|
|
|
Becton, Dickinson and Company |
Financials |
|
U.S. Revenues
(Millions of Dollars)
Non-U.S. Revenues
(Millions of Dollars)
Net Income
(Millions of Dollars)
Return on Invested Capital
(Percent)
Earning Per Share-Diluted
(Dollars)
Dividends Per Common Share
(Dollars)
3000
2500
2000
1500
1000
500
0
3000
2500
2000
1500
1000
500
0
750
600
450
300
150
0
30
25
20
15
10
5
0
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.75
0.60
0.45
0.30
0.15
0.0
01
02
03
04
05
01
02
03
04
05
01
02
03
04
05
01
02
03
04
05
01
02
03
04
05
01
02
03
04
05
17
|
|
|
Becton, Dickinson and Company |
Summary |
|
|
Ten-Year Summary of Selected Financial Data
Years Ended September 30
Dollars in millions, except per-share amounts |
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
$ |
5,414.7 |
|
$ |
4,934.7 |
|
$ |
4,463.5 |
|
$ |
3,960.4 |
|
Research and Development Expense |
|
271.6 |
|
|
235.6 |
|
|
224.2 |
|
|
207.2 |
|
Operating Income |
|
1,031.2 |
|
|
787.3 |
|
|
761.2 |
|
|
674.5 |
|
Interest Expense, Net |
|
19.3 |
|
|
29.6 |
|
|
36.5 |
|
|
33.2 |
|
Income From Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Before Income Taxes |
|
1,004.9 |
|
|
752.9 |
|
|
722.0 |
|
|
627.5 |
|
Income Tax Provision |
|
312.6 |
|
|
170.4 |
|
|
167.0 |
|
|
148.1 |
|
Net Income |
|
722.3 |
|
|
467.4 |
|
|
547.1 |
|
|
480.0 |
|
Basic Earnings Per Share |
|
2.87 |
|
|
1.85 |
|
|
2.14 |
|
|
1.85 |
|
Diluted Earnings Per Share |
|
2.77 |
|
|
1.77 |
|
|
2.07 |
|
|
1.79 |
|
Dividends Per Common Share |
|
.72 |
|
|
.60 |
|
|
.40 |
|
|
.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
$ |
2,975.3 |
|
$ |
2,641.3 |
|
$ |
2,503.5 |
|
$ |
2,091.4 |
|
Current Liabilities |
|
1,299.4 |
|
|
1,050.1 |
|
|
1,059.4 |
|
|
1,271.5 |
|
Property, Plant and Equipment, Net |
|
1,933.7 |
|
|
1,881.0 |
|
|
1,831.8 |
|
|
1,750.4 |
|
Total Assets |
|
6,072.0 |
|
|
5,752.6 |
|
|
5,572.3 |
|
|
5,029.0 |
|
Long-Term Debt |
|
1,060.8 |
|
|
1,171.5 |
|
|
1,184.0 |
|
|
803.0 |
|
Shareholders Equity |
|
3,284.0 |
|
|
3,067.9 |
|
|
2,897.0 |
|
|
2,480.9 |
|
Book Value Per Common Share |
|
13.26 |
|
|
12.30 |
|
|
11.54 |
|
|
9.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin |
|
50.8 |
% |
|
49.3 |
% |
|
48.5 |
% |
|
48.3 |
% |
Return on Revenues(E) |
|
12.8 |
% |
|
11.8 |
% |
|
12.4 |
% |
|
12.1 |
% |
Return on Total Assets(B)(E) |
|
17.9 |
% |
|
14.1 |
% |
|
14.4 |
% |
|
13.6 |
% |
Return on Equity(E) |
|
21.8 |
% |
|
19.5 |
% |
|
20.6 |
% |
|
20.0 |
% |
Debt to Capitalization(D)(E) |
|
27.3 |
% |
|
28.1 |
% |
|
30.5 |
% |
|
32.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Data |
|
|
|
|
|
|
|
|
|
|
|
|
Number of Employees |
|
25,600 |
|
|
25,000 |
|
|
24,800 |
|
|
25,200 |
|
Number of Shareholders |
|
9,442 |
|
|
9,654 |
|
|
9,868 |
|
|
10,050 |
|
Average Common and Common |
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Assuming Dilution (millions) |
|
260.7 |
|
|
263.3 |
|
|
263.6 |
|
|
268.2 |
|
Depreciation and Amortization |
$ |
387.5 |
|
$ |
357.2 |
|
$ |
335.8 |
|
$ |
296.6 |
|
Capital Expenditures |
|
317.6 |
|
|
265.7 |
|
|
259.2 |
|
|
255.7 |
|
|
|
(A) |
Includes cumulative effect of accounting change of $36.8 ($.14 per basic and diluted share). |
|
|
(B) |
Earnings before interest expense, taxes and cumulative effect of accounting changes as a percent of average total assets. |
|
|
(C) |
Excludes the cumulative effect of accounting changes. |
|
|
(D) |
Total debt as a percent of the sum of total debt, shareholders equity and net non-current deferred income tax liabilities. |
|
|
(E) |
Excludes discontinued operations in 1999 to 2005. |
18
|
|
|
Becton, Dickinson and Company |
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
$ |
3,667.6 |
|
$ |
3,544.7 |
|
$ |
3,412.6 |
|
$ |
3,116.9 |
|
$ |
2,810.5 |
|
$ |
2,769.8 |
|
Research and Development Expense |
|
199.6 |
|
|
212.8 |
|
|
220.7 |
|
|
217.9 |
|
|
180.6 |
|
|
154.2 |
|
Operating Income |
|
632.5 |
|
|
507.4 |
|
|
477.3 |
|
|
405.4 |
|
|
450.5 |
|
|
431.2 |
|
Interest Expense, Net |
|
55.3 |
|
|
74.2 |
|
|
72.0 |
|
|
56.3 |
|
|
39.4 |
|
|
37.4 |
|
Income From Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Income Taxes |
|
535.2 |
(A) |
|
512.7 |
|
|
404.8 |
|
|
340.9 |
|
|
422.6 |
|
|
393.7 |
|
Income Tax Provision |
|
134.2 |
|
|
122.0 |
|
|
96.9 |
|
|
104.3 |
|
|
122.6 |
|
|
110.2 |
|
Net Income |
|
401.7 |
(A) |
|
392.9 |
|
|
275.7 |
|
|
236.6 |
|
|
300.1 |
|
|
283.4 |
|
Basic Earnings Per Share |
|
1.55 |
(A) |
|
1.54 |
|
|
1.09 |
|
|
.95 |
|
|
1.21 |
|
|
1.10 |
|
Diluted Earnings Per Share |
|
1.49 |
(A) |
|
1.49 |
|
|
1.04 |
|
|
.90 |
|
|
1.15 |
|
|
1.05 |
|
Dividends Per Common Share |
|
.38 |
|
|
.37 |
|
|
.34 |
|
|
.29 |
|
|
.26 |
|
|
.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
$ |
1,930.1 |
|
$ |
1,847.6 |
|
$ |
1,843.0 |
|
$ |
1,542.8 |
|
$ |
1,312.6 |
|
$ |
1,276.8 |
|
Current Liabilities |
|
1,285.4 |
|
|
1,382.4 |
|
|
1,358.6 |
|
|
1,091.9 |
|
|
678.2 |
|
|
766.1 |
|
Property, Plant and Equipment, Net |
|
1,701.3 |
|
|
1,565.5 |
|
|
1,423.9 |
|
|
1,302.7 |
|
|
1,250.7 |
|
|
1,244.1 |
|
Total Assets |
|
4,790.8 |
|
|
4,505.1 |
|
|
4,437.0 |
|
|
3,846.0 |
|
|
3,080.3 |
|
|
2,889.8 |
|
Long-Term Debt |
|
782.8 |
|
|
778.5 |
|
|
954.0 |
|
|
765.2 |
|
|
665.4 |
|
|
468.2 |
|
Shareholders Equity |
|
2,321.7 |
|
|
1,956.0 |
|
|
1,768.7 |
|
|
1,613.8 |
|
|
1,385.4 |
|
|
1,325.2 |
|
Book Value Per Common Share |
|
8.96 |
|
|
7.72 |
|
|
7.05 |
|
|
6.51 |
|
|
5.68 |
|
|
5.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin |
|
48.7 |
% |
|
48.6 |
% |
|
49.9 |
% |
|
50.6 |
% |
|
49.7 |
% |
|
48.4 |
% |
Return on Revenues(E) |
|
11.9 |
%(C) |
|
11.0 |
% |
|
9.0 |
% |
|
7.6 |
% |
|
10.7 |
% |
|
10.2 |
% |
Return on Total Assets(B)(E) |
|
13.6 |
% |
|
13.4 |
% |
|
11.6 |
% |
|
11.7 |
% |
|
15.9 |
% |
|
15.2 |
% |
Return on Equity(E) |
|
20.3 |
%(C) |
|
21.0 |
% |
|
18.2 |
% |
|
15.8 |
% |
|
22.1 |
% |
|
20.8 |
% |
Debt to Capitalization(D)(E) |
|
34.0 |
% |
|
41.7 |
% |
|
47.6 |
% |
|
41.4 |
% |
|
36.3 |
% |
|
34.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Employees |
|
24,800 |
|
|
25,000 |
|
|
24,000 |
|
|
21,700 |
|
|
18,900 |
|
|
17,900 |
|
Number of Shareholders |
|
10,329 |
|
|
10,822 |
|
|
11,433 |
|
|
9,784 |
|
|
8,944 |
|
|
8,027 |
|
Average Common and Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming Dilution (millions) |
|
268.8 |
|
|
263.2 |
|
|
264.6 |
|
|
262.1 |
|
|
259.6 |
|
|
267.6 |
|
Depreciation and Amortization |
$ |
293.2 |
|
$ |
273.7 |
|
$ |
257.8 |
|
$ |
228.7 |
|
$ |
209.8 |
|
$ |
200.5 |
|
Capital Expenditures |
|
364.1 |
|
|
371.0 |
|
|
311.4 |
|
|
181.4 |
|
|
170.3 |
|
|
145.9 |
|
19
|
|
|
Becton, Dickinson and Company |
Financial Review |
|
Company Overview
Becton, Dickinson and Company (BD) is a medical technology company engaged principally
in the manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and
diagnostic products used by healthcare institutions, life science researchers, clinical laboratories,
industry and the general public. Our business consists of three worldwide business segmentsBD
Medical (Medical), BD Diagnostics (Diagnostics) and BD Biosciences (Biosciences).
Our products are marketed in the United States and internationally through independent distribution
channels, directly to end-users and by independent sales representatives. References to years throughout
this discussion relate to our fiscal years, which end on September 30.
BD management operates the business consistent with the following core strategies:
|
To increase revenue growth by focusing on products that deliver greater benefits to patients, healthcare
workers and researchers; |
|
To improve operating effectiveness and balance sheet productivity; and, |
|
To strengthen organizational and associate capabilities in the ever-changing healthcare environment. |
In assessing the outcomes of these strategies and 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, investment in research and development, and cash
flows.
The results of our strategies are reflected in our fiscal 2005 financial and operational performance.
Worldwide revenues in 2005 of $5.4 billion increased 10% from the prior year and reflected estimated
volume increases of 6%, an estimated increase due to favorable foreign currency translation of 3%,
and estimated price increases of less than 1%. U.S. revenues increased 6% to $2.6 billion. International
revenues increased 13% to $2.8 billion. For a discussion of the financial impact of exchange rate
fluctuations and the ways and extent to which we attempt to mitigate such impact, see Financial
Instrument Market Risk below.
Consistent with our strategy to provide products that deliver greater benefits to healthcare workers,
and recognizing the issues surrounding sharps-related injuries, BD has developed a wide array of
safety-engineered devices that are designed to reduce the incidence of needlestick injuries and exposure
to bloodborne pathogens. These products are offered through our Medical and Diagnostics segments.
Sales in the United States of safety-engineered devices grew 9% to $842 million in 2005, compared
with $775 million in 2004. International sales of safety-engineered devices were approximately $273
million in 2005 compared with $203 million in 2004. In 2006, we expect U.S. sales of safety-engineered
devices to increase about 8%. We are also anticipating growth of international safety sales of about 20%.
Income from Continuing Operations was $692 million, or $2.66 per diluted share, in 2005 as compared
with $583 million, or $2.21 per diluted share, in 2004. Comparisons of Income from Continuing Operations
between 2005 and 2004 are affected by the following significant items that are reflected in our financial
results:
2005 |
|
We recorded share-based compensation expense of $70 million ($50 million after taxes), or $.19 per
diluted share, in connection with the adoption of Statement of Financial Accounting Standards No.
123 (revised 2004), Share Based Payment (SFAS No. 123 (R)). Prior periods
were not restated. |
|
We recorded a one-time tax charge of $77 million, or $.30 per diluted share, attributable to the planned
repatriation of foreign earnings under the American Jobs Creation Act of 2004. |
|
|
2004 |
|
We recorded a charge of $100 million ($63 million after taxes), or $.24 per diluted share, related
to a litigation settlement. |
|
We recorded a charge of $45 million ($28 million after taxes), or $.11 per diluted share, related to
the voluntary recall and writeoff of certain blood glucose strip inventory and other actions taken
with respect to our blood glucose monitoring (BGM) products. |
20
Financial Review Becton, Dickinson and Company
Our financial position remains strong with net cash provided by continuing operating activities of
approximately $1.2 billion for 2005 and our debt-to-capitalization ratio from continuing operations
(total debt as a percentage of the sum of shareholders equity, net non-current deferred income
tax liabilities and total debt) having improved to 27.3% at September 30, 2005, from 28.1% at September
30, 2004.
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 reduces 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.
In 2005, general inflation did not have a material impact on our overall operations. However, it is
possible that general inflation rates will rise in 2006 and beyond, and could have a greater impact
on worldwide economies and consequently, on BD. In 2005, we experienced higher resin purchase costs,
primarily due to recent increases in world oil prices and shortages of supply. BD currently expends
approximately $150 to $170 million per year to purchase supplies of resins, which are oil-based components
used in the manufacture of certain BD products. However, we continue to strive to improve our profit
margins through increased sales of products with higher margins, cost reduction programs, productivity
improvements and, to a lesser extent, periodic price increases and adjustments. For example, in 2006,
we expect our gross profit margin to improve by 30 to 40 basis points over 2005.
Our anticipated revenue growth over the next three years is expected to come from the following:
|
Core business growth and expansion; |
|
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. |
Accounting Change
Effective October 1, 2004, we adopted SFAS No. 123 (R). This statement requires compensation cost relating
to share-based payment transactions to be recognized in net income using a fair-value measurement
method. In November 2004, equity-based awards were granted to employees under a new long-term incentive
program, which consisted of stock options and restricted stock awards. See Note 13 of the Notes Consolidated
Financial Statements for a discussion of the valuation methodology used in estimating the fair value
of these equity-based awards.
In previous years, we had used stock options as our primary form of incentive compensation and such
stock options were accounted for under the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees. This method measured
share-based compensation expense as the amount by which the market price of the stock on the date
of grant exceeded the exercise price. Under APB No. 25, no share-based compensation expense was recognized
for stock options since the exercise price equaled the market price of the underlying stock on the
date of grant. We elected the modified prospective transition method for adopting SFAS No. 123(R)
and therefore, prior periods were not restated. Under this method, the provisions of SFAS No. 123(R)
were applied to new awards granted after the time of adoption, 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. See Note 2 of the Notes to Consolidated Financial Statements for additional discussion.
As a result of the adoption of SFAS No. 123(R) and the granting of restricted stock unit awards in
November 2004, we recorded share-based compensation expense in 2005 as follows:
(millions of dollars) |
2005 |
|
|
Selling and administrative expense |
$ |
54 |
|
|
Cost of products sold |
|
10 |
|
|
Research and development expense |
|
6 |
|
|
Total |
$ |
70 |
|
|
Share-based compensation expense was recorded in corporate unallocated expense for segment reporting
purposes. For 2006, we estimate share-based compensation expense will reduce diluted earnings per
share from continuing operations by about $.23, as compared with $.19 in 2005.
21
Financial Review Becton, Dickinson and Company
Results of Continuing Operations
Medical Segment
Medical revenues in 2005 of $3.0 billion increased $278 million, or 10%, over 2004, which includes
an estimated impact of favorable foreign currency translation of 3%.
The following is a summary of revenues by organizational unit:
(millions of dollars) |
2005 |
|
|
2004 |
|
Total
Change |
|
Foreign
Exchange
Impact |
|
Medical Surgical Systems |
$ |
1,661 |
|
|
$ |
1,541 |
|
|
8 |
% |
|
3 |
% |
Diabetes Care |
|
674 |
|
|
|
586 |
|
|
15 |
% |
|
2 |
% |
Pharmaceutical Systems |
|
563 |
|
|
|
497 |
|
|
13 |
% |
|
4 |
% |
Ophthalmic Systems |
|
60 |
|
|
|
56 |
|
|
7 |
% |
|
3 |
% |
Total Revenues |
$ |
2,958 |
|
|
$ |
2,680 |
|
|
10 |
% |
|
3 |
% |
Medical revenues reflect the continued conversion in the United States to safety-engineered products,
which accounted for sales of $490 million, as compared with $459 million in the prior year. Included
in Medical revenues were international sales of safety-engineered products of $81 million, as compared
with $63 million in the prior year. Revenue growth in the Medical Surgical Systems unit of this segment
was primarily driven by the growth in safety-engineered products and prefilled flush syringes. The
Diabetes Care units revenue growth reflected strong sales of BGM products in the United States
and pen needles worldwide. Sales of BGM meters, test strips and related disposables in the United
States and Canada were $76 million, as compared with $42 million in 2004. BGM products were introduced
into the European market through the launch in Germany during the fourth quarter of 2005. We expect
revenues of BGM products to be about $115 million in 2006. Revenue growth in the Pharmaceutical Systems
unit was primarily attributable to a 19% increase in international sales. For 2006, we expect the
full year revenue growth for the Medical Segment to be about 5% to 6%, which includes an estimated
unfavorable impact of foreign currency of about 2%.
Medical operating income was $711 million, or 24.0% of Medical revenues, in 2005, as compared with
$567 million, or 21.1% in 2004, which included $45 million of BGM charges as further discussed below.
Operating income as a percentage of revenues reflects gross margin improvement from increased sales
of products that have higher overall gross profit margins, in particular, safety-engineered products
and pen needles. See further discussion on gross profit margin improvement below.
Selling and administrative
expense as a percent of Medical revenues in 2005 was slightly lower compared with 2004, primarily
due to the favorable effects from a weaker U.S. dollar along with tight controls on base spending.
Incremental investments to support the BGM initiative were about $14 million. Research and development
expenses in 2005 increased $14 million, or 17%, reflecting continued investment in the development
of new products.
Diagnostics Segment
Diagnostics revenues in 2005 of $1.7 billion increased $125 million, or 8%, over 2004, which includes
an estimated favorable impact of foreign currency translation of 2%.
The
following is a summary of revenues by organizational unit:
(millions of dollars) |
2005 |
|
|
2004 |
|
Total
Change |
|
Foreign
Exchange
Impact |
|
Preanalytical Systems |
$ |
855 |
|
|
$ |
788 |
|
|
8 |
% |
|
2 |
% |
Diagnostic Systems |
|
802 |
|
|
|
744 |
|
|
8 |
% |
|
2 |
% |
Total Revenues |
$ |
1,657 |
|
|
$ |
1,532 |
|
|
8 |
% |
|
2 |
% |
Revenue growth in the Preanalytical Systems unit reflected the continued conversion in the United States
to safety-engineered products and accounted for sales of $352 million, compared with $317 million
in 2004. Sales of the BD Vacutainer Push Button Collection Sets were key to this trend. Preanalytical Systems revenues included international
sales of safety-engineered products of $192 million, compared with $140 million in 2004. Geographic
expansion in the Middle East and Asia Pacific regions, particularly in China, also contributed to
the growth in the Preanalytical Systems unit. The Diagnostic Systems unit experienced solid worldwide
sales of its automated diagnostic platforms, including the molecular BD ProbeTec ET, and the BD Phoenix Automated Microbiology System. These platforms reported combined incremental sales of $17 million
over 2004. For 2006, we expect the full year revenue growth for the Diagnostics Segment to be about
5% to 6%, which includes an estimated unfavorable impact of foreign currency of about 2%.
Diagnostics operating income was $414 million, or 25.0% of Diagnostics revenues, in 2005, compared
with $359 million, or 23.5%, in 2004. The increase in operating income as a percentage of revenues
reflects gross profit improvement from increased sales of products that have higher overall gross
profit margins, in particular, safety-engineered products and the BD ProbeTec ET platform. See further discussion on gross profit margin improvement below. Selling and administrative
expense as a percent of Diagnostics revenues in 2005 was slightly lower
22
Financial Review Becton, Dickinson and Company
compared with 2004 primarily due to the favorable impact from a weaker U.S. dollar along with tight
controls on spending. Research and development expenses in 2005 increased $6 million, or 8%, reflecting
spending on new programs, and were partially offset by lower spending of $3 million, as a result
of the completion of our cancer biomarker discovery program in 2004.
Biosciences Segment
Biosciences revenues in 2005 of $800 million increased $77 million, or 11%, over 2004, which includes
an estimated impact of favorable foreign currency translation of 2%.
The following is a summary of revenues by organizational unit:
(millions of dollars) |
2005 |
|
|
2004 |
|
Total
Change |
|
Foreign
Exchange
Impact |
|
Immunocytometry Systems |
$ |
452 |
|
|
$ |
397 |
|
|
14 |
% |
|
3 |
% |
Pharmingen |
|
141 |
|
|
|
136 |
|
|
4 |
% |
|
2 |
% |
Discovery Labware |
|
207 |
|
|
|
190 |
|
|
9 |
% |
|
3 |
% |
Total Revenues |
$ |
800 |
|
|
$ |
723 |
|
|
11 |
% |
|
3 |
% |
Revenue growth in the Immunocytometry Systems unit reflects strong sales of instruments and flow cytometry
reagents, driven by increased demand for research and clinical analyzers. Revenue growth in the Immunocytometry
Systems and Pharmingen units was adversely impacted by $1.8 million and $4.5 million, respectively,
as a result of terminating a distribution agreement in 2005. Revenue growth in the Discovery Labware
unit resulted primarily from market share gains. For 2006, we expect the full year revenue growth
for the Biosciences Segment to be about 8% to 9%, which includes an estimated unfavorable impact
of foreign currency of about 2%.
Biosciences operating income was $175 million, or 21.9% of Biosciences revenues in 2005, compared with
$156 million, or 21.6% in 2004. The increase in operating income as a percentage of revenues reflects
gross profit improvement from increased sales of products that have higher overall gross profit margins,
in particular, research instruments and reagents. See further discussion of gross profit margin improvement
below. Selling and administrative expense as a percent of Biosciences revenues in 2005 was comparable
with 2004. The favorable effects from a weaker U.S. dollar and tight controls on spending were offset
by one-time costs of $8 million incurred in connection with the termination of a distribution agreement.
Research and development expenses in 2005 increased $5 million, or 10%, reflecting spending on new
product development and advanced technology, particularly in the Immunocytometry Systems unit.
Geographic Revenues
On a geographic basis, revenues outside the United States in 2005 increased 13% to $2.8 billion. This
increase includes an estimated impact of favorable foreign currency translation of 5%. International
sales of safety-engineered devices were approximately $273 million in 2005, compared with $203 million
in 2004. Our Asia Pacific/Japan, Canada, Europe, and Latin American regions contributed double-digit
revenue growth in 2005.
Revenues in the United States in 2005 of $2.6 billion increased 6%, primarily from strong sales of
safety-engineered devices, prefilled flush syringes and diabetes care products, including BGM products.
Revenues of immunocytometry instruments and reagents also demonstrated good growth.
Gross Profit Margin
Gross profit margin was 50.8% in 2005, compared with 49.3% in 2004. Gross profit margin in the current
year included share-based compensation expense of $9.7 million, which reduced gross profit margin
by 0.2%. Gross profit margin in 2004 included BGM charges of $45 million, as discussed below,
which reduced gross profit margin by 0.9%. Gross profit margin in the current year reflected an estimated
0.6% improvement resulting from a weaker U.S. dollar, an estimated 0.6% improvement relating to increased
sales of products with higher margins, with the remaining 0.5% improvement primarily related
to productivity gains. These improvements more than offset an estimated 0.8% unfavor-able impact
of higher raw material costs and intangible asset writedowns of 0.1%. We expect gross profit margin
to improve by 30 to 40 basis points for fiscal 2006.
Operating Expenses
Selling and administrative expense (SSG&A) of $1.4 billion in 2005 was 26.8% of revenues,
compared with $1.3 billion or 26.6% of revenues, in 2004. SSG&A in 2005 included $54 million
of share-based compensation expense, which amounted to 1.0%. Aggregate expenses for 2005 reflect
base spending increases of $49 million, in line with inflation. In 2006, SSG&A as a percentage
of revenues is expected to decrease by 40 to 50 basis points.
Research and development (R&D) in 2005 was $272 million, or 5.0% of revenues, compared
with $236 million, or 4.8% of revenues, in 2004. R&D in 2005 included $6 million of share-based
compensation expense, which amounted to 0.1% of revenues. The increase in R&D expenditures 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 2004. In 2006, we expect R&D to grow about 12%.
23
Financial Review Becton, Dickinson and Company
Operating Income
Operating margin in 2005 was 19.0% of revenues, compared with 16.0% in 2004. Operating income of $1.0
billion in 2005 included $70 million of share-based compensation expense. Operating income of $787
million in 2004 included the $45 million of BGM charges and the $100 million litigation settlement,
both discussed further below.
Non-Operating Expense and Income
Interest expense was $56 million in 2005 compared with $45 million in 2004 and reflects higher interest
rates on floating rate debt and on fixed-to-floating interest rate swap transactions. Interest income
was $36 million in 2005 compared with $15 million in 2004 and reflects increased interest income
due to higher interest rates and cash balances.
Income Taxes
The effective tax rate in 2005 was 31.1% and reflected a 7.7% increase relating to the one-time charge
in the fourth quarter of 2005 attributable to the planned repatriation of earnings in 2006 under
the American Jobs Creation Act of 2004. In addition, the effective tax rate in 2005 reflected a 0.2%
benefit relating to share-based compensation and a 1.0% benefit due to the reversal of tax accruals
in connection with the conclusion of tax examinations in four non-U.S. jurisdictions. In 2004, the
effective tax rate was 22.6% and reflected a 1.0% benefit relating to the BGM charges, and a 1.5%
benefit relating to the litigation settlement. In 2006, we expect our effective tax rate to be about 26%.
Income and Diluted Earnings per
Share from Continuing Operations
Income from continuing operations and diluted earnings per share from continuing operations in 2005
were $692 million and $2.66, respectively. Share-based compensation expense and the tax repatriation
charge decreased income from continuing operations in the aggregate by $127 million and diluted earnings
per share from continuing operations by $.49 in 2005. Income from continuing operations and diluted
earnings per share from continuing operations in 2004 were $583 million and $2.21, respectively.
The BGM charges and the litigation settlement reduced income from continuing operations in the aggregate
by $91 million and diluted earnings per share from continuing operations by $.35 in 2004.
Discontinued Operations
On August 31, 2005, we completed the sale of the Clontech unit of the Biosciences segment for $62 million.
Clontechs results of operations are reported as discontinued operations for all periods presented
in the Consolidated Statements of Income. Income from discontinued operations in 2005 reflected a
gain on sale of $13 million ($29 million after taxes). The loss from discontinued operations in 2004
reflected an after-tax charge of approximately $116 million to write down the net assets of Clontech
to their estimated fair value. See Note 17 of the Notes to Consolidated Financial Statements for
additional discussion.
Financial Instrument Market Risk
We selectively use financial instruments to manage the impact of foreign exchange rate and interest
rate fluctuations on earnings. The counterparties to these contracts are highly rated financial institutions.
We do not enter into financial instruments for trading or speculative purposes.
We have foreign currency exposures throughout Europe, Asia Pacific, Canada, Japan and Latin America.
We face transactional currency exposures that arise when we enter into transactions in non-hyperinflationary
countries, generally on an intercompany basis, that are denominated in currencies other than our
functional currency. We hedge substantially all such foreign exchange exposures primarily through
the use of forward contracts and currency options. We also face currency exposure that arises from
translating the results of our worldwide operations to the U.S. dollar at exchange rates that have
fluctuated from the beginning of a reporting period. We purchase option and forward contracts to
partially protect against adverse foreign exchange rate movements. Gains or losses on our derivative
instruments are largely offset by the gains or losses on the underlying hedged transactions. For
foreign currency derivative instruments, market risk is determined by calculating the impact on fair
value of an assumed change in foreign exchange rates relative to the U.S. dollar. Fair values were
estimated based on market prices, when available, or dealer quotes. The reduction in fair value of
our purchased option contracts is limited to the options fair value. With respect to the derivative
instruments outstanding at September 30, 2005, a 10% appreciation of the U.S. dollar over a one-year
period would increase pre-tax earnings by $29 million, while a 10% depreciation of the U.S. dollar
would increase pre-tax earnings by $15 million. Comparatively, considering our derivative instruments
outstanding at September 30, 2004, a
24
Financial Review Becton, Dickinson and Company
10% appreciation of the U.S. dollar over a one-year period would have increased pre-tax earnings by
$39 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings by
$6 million. These calculations do not reflect the impact of exchange gains or losses on the underlying
positions that would substantially offset the results of the derivative instruments.
Our primary interest rate exposure results from changes in short-term U.S. dollar interest rates. Our
debt and interest-bearing investments at September 30, 2005 are substantially all U.S. dollar-denominated.
Therefore, transaction and translation exposure relating to such instruments is minimal. When managing
interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate
instruments. We may enter into interest rate swaps to help maintain this balance and manage debt
and interest-bearing investments in tandem, since these items have an offsetting impact on interest
rate exposure. For interest rate derivative instruments, market risk is determined by calculating
the impact to fair value of an assumed change in interest rates across all maturities. Fair values
are estimated based on dealer quotes. A change in interest rates on short-term debt and interest-bearing
investments is assumed to impact earnings and cash flow, but not fair value because of the short
maturities of these instruments. A change in interest rates on long-term debt is assumed to impact
fair value but not earnings or cash flow because the interest on such obligations is fixed. Based
on our overall interest rate exposure at September 30, 2005 and 2004, a change of 10% in interest
rates would not have a material effect on our earnings or cash flows over a one-year period. An increase
of 10% in interest rates would decrease the fair value of our long-term debt and interest rate swaps
at September 30, 2005 and 2004 by approximately $40 million and $42 million, respectively. A 10%
decrease in interest rates would increase the fair value of our long-term debt and interest rate
swaps at September 30, 2005 and 2004 by approximately $34 million and $46 million, respectively.
Liquidity and Capital Resources
Cash Flows from Continuing Operating Activities
Cash provided by continuing operating activities, which continues to be our primary source of funds
to finance operating needs and capital expenditures, was $1.2 billion in 2005 compared with $1.1
billion in 2004.
Cash Flows from Continuing Investing Activities
Capital expenditures were $318 million in 2005, compared with $266 million in 2004. Medical capital
spending of $185 million related primarily to various capacity expansions. Diagnostics capital spending,
which totaled $100 million, included spending for various capacity expansions as well as for safety
devices. Biosciences capital spending of $22 million included spending on manufacturing capacity
expansions. In 2006, capital expenditures are expected to be in the $400 million range.
Cash Flows from Continuing Financing Activities
Net cash used for financing activities was $525 million in 2005, as
compared with $507 million in 2004 and included the repurchase of shares of
our common stock for approximately $550 million, compared to approximately
$450 million in 2004. At September 30, 2005, 4.3 million common shares remained
available for purchase under a November 2004 Board of Directors authorization
to repurchase up to 10 million common shares. For 2006, we expect that cash
used to repurchase common shares will be about $450 million. In 2005, the
Company exercised the early redemption option available under the terms of
our 8.7% Debentures, due January 15, 2025. Redemption, which is reflected
in payments of long-term debt, was for the full $100 million in outstanding
principal at a price of 103.949%. Total debt at September 30, 2005, was $1.3
billion compared with $1.2 billion at September 30, 2004. Short-term debt
increased to 16% of total debt at year-end, from 4% at the end of 2004. Floating
rate debt was 41% of total debt at the end of 2005 and 55% at the end of 2004.
Our weighted average cost of total debt at the end of 2005 was 5.3%, up from
4.3% at the end of 2004 due to higher short-term interest rates. Debt-to-capitalization
at year-end improved to 27.3% from 28.1% last year. Cash and equivalents were
$1,043 million and $719 million at September 30, 2005 and 2004, respectively.
We have in place a commercial paper borrowing program that is available to meet our short-term financing
needs, including working capital requirements. Borrowings outstanding under this program were $200
million at September 30, 2005. We maintain 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 and includes a single financial
25
Financial Review Becton, Dickinson and Company
covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before
income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the
most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio had
ranged from 18-to-1 to 21-to-1. The facility, under which there were no borrowings outstanding at
September 30, 2005, can be used to support the commercial paper program or for general corporate
purposes. In addition, we have informal lines of credit outside the United States.
At September 30, 2005, our long-term debt was rated A2 by Moodys and A+
by Standard and Poors, and our commercial paper ratings were P-1 by Moodys
and A-1 by Standard and Poors. Given the availability of the various credit facilities
and our strong credit ratings, we continue to have a high degree of confidence in our ability to
refinance maturing short-term and long-term debt, as well as to incur substantial additional debt,
if required.
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 (the AJCA) was signed into law in October 2004.
The AJCA creates a temporary incentive for U.S. multinationals to repatriate accumulated income earned
outside the United States. As a result of the passage of the AJCA, we revisited our policy of indefinite
reinvestment of foreign earnings and determined that we will repatriate approximately $1.3 billion
in fiscal 2006. As a result, we recorded a one-time tax charge of $77 million in the fourth quarter
of 2005 attributable to the planned repatriation of these earnings. Uses of the repatriated funds
include cash expenditures for compensation and benefits to existing and newly hired U.S. workers,
U.S. infrastructure and capital investments and other activities as permitted under the AJCA.
Contractual Obligations
In the normal course of business, we enter into contracts and commitments that obligate us to make
payments in the future. The table below sets forth BDs significant contractual obligations
and related scheduled payments:
(millions of dollars) |
Total |
|
2006 |
|
2007
to 2008 |
|
2009
to 2010 |
|
2011 and
Thereafter |
|
Short-term debt |
$ |
207 |
|
$ |
207 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Long-term debt(A) |
|
1,819 |
|
|
60 |
|
|
208 |
|
|
307 |
|
|
1,244 |
|
Operating leases |
|
142 |
|
|
42 |
|
|
59 |
|
|
26 |
|
|
15 |
|
Purchase obligations(B) |
|
216 |
|
|
183 |
|
|
28 |
|
|
5 |
|
|
|
|
Total(C) |
$ |
2,384 |
|
$ |
492 |
|
$ |
295 |
|
$ |
338 |
|
$ |
1,259 |
|
|
|
(A) |
Long-term debt obligations include expected principal and interest obligations, including interest rate swaps. The interest rate forward curve at September 30, 2005 was used to compute the amount of the contractual obligation for variable rate debt instruments and swaps. |
|
|
(B) |
Purchase obligations are for purchases made in the normal course of business to meet operational and capital requirements. |
|
|
(C) |
Required funding obligations for 2006 relating to pension plans are not expected to be material. |
2004 Compared With 2003
Worldwide revenues in 2004 were $4.9 billion, an increase of 11% over 2003, and included the estimated
favorable impact of foreign currency translation of 5%. The remainder of the growth resulted primarily
from volume increases in all segments.
Medical Segment
Medical revenues in 2004 of $2.7 billion increased 9% over 2003, which includes an estimated impact
of favorable foreign currency translation of 5%.
The following is a summary of revenues by organizational unit:
(millions of dollars) |
2004 |
|
2003 |
|
Total
Change |
|
Foreign
Exchange
Impact |
|
Medical Surgical Systems |
$ |
1,541 |
|
$ |
1,426 |
|
|
8 |
% |
|
4 |
% |
Diabetes Care |
|
586 |
|
|
542 |
|
|
8 |
% |
|
4 |
% |
Pharmaceutical Systems |
|
497 |
|
|
436 |
|
|
14 |
% |
|
9 |
% |
Ophthalmic Systems |
|
56 |
|
|
53 |
|
|
6 |
% |
|
6 |
% |
Total Revenues |
$ |
2,680 |
|
$ |
2,457 |
|
|
9 |
% |
|
5 |
% |
26
Financial Review Becton, Dickinson and Company
Revenue growth in the Medical Surgical Systems unit of this segment included U.S. safety-engineered
product sales of $459 million compared with $412 million in 2003. Revenue growth in the Diabetes
Care unit included sales of BGM meters, test strips, and related disposables in the United States
and Canada of $42 million compared with $15 million in 2003. Growth in the Diabetes Care unit was
negatively affected by the decline in the home healthcare product area. Revenue growth in the Pharmaceutical
Systems unit reflects the adverse impact of customer buying patterns to support product launches
in 2003. Revenue growth in the Medical Surgical Systems unit and Pharmaceutical Systems unit reflected
lower sales of BD Bifurcated Needles used in the administration of smallpox vaccines, which were $2 million and $26
million in 2004 and 2003, respectively.
Medical operating income was $567 million in 2004, which included $45 million of BGM charges, as discussed
further below, compared with $556 million in 2003. Medical operating income in 2004 also reflected
gross profit margin improvement resulting from the continued conversion to safety-engineered devices
from conventional products and $15 million of benefits of the 2002 manufacturing restructuring program,
partially offset by higher research and development spending to support several new product initiatives.
Diagnostics Segment
Diagnostics revenues in 2004 of $1.5 billion increased 12% over 2003, which includes an estimated impact
of favorable foreign currency translation of 4%.
The following is a summary of revenues by organizational unit:
(millions of dollars) |
2004 |
|
2003 |
|
Total
Change |
|
Foreign
Exchange
Impact |
|
Preanalytical Systems |
$ |
788 |
|
$ |
707 |
|
|
11 |
% |
|
4 |
% |
Diagnostic Systems |
|
744 |
|
|
667 |
|
|
12 |
% |
|
4 |
% |
Total Revenues |
$ |
1,532 |
|
$ |
1,374 |
|
|
12 |
% |
|
4 |
% |
Revenues in the Preanalytical Systems unit included U.S. safety-engineered device sales of $317 million
compared with $272 million in 2003. Revenues in the Diagnostic Systems unit reflected strong worldwide
sales of its respiratory and flu diagnostic tests in Japan and the United States over 2003. This
unit also experienced strong worldwide sales of its molecular
diagnostic platform, BD ProbeTec ET, which reported incremental sales of $18 million over 2003, and good worldwide performance
in the more traditional infectious disease categories.
Diagnostics operating income was $359 million in 2004 compared with $302 million in 2003. This increase
primarily reflected gross profit margin improvement resulting from increased sales of products that
have higher overall gross profit margins, including safety-engineered products and the BD ProbeTec ET platform.
Biosciences Segment
Biosciences revenues in 2004 of $723 million increased 14% over 2003, which includes an estimated impact
of favorable foreign currency translation of 5%.
The following is a summary of revenues by organizational unit:
|
|
|
|
|
|
|
|
|
|
(millions of dollars) |
2004 |
|
2003 |
|
Total
Change |
|
Foreign
Exchange
Impact |
|
Immunocytometry Systems |
$ |
397 |
|
$ |
332 |
|
|
20 |
% |
|
6 |
% |
Pharmingen |
|
136 |
|
|
121 |
|
|
12 |
% |
|
5 |
% |
Discovery Labware |
|
190 |
|
|
180 |
|
|
6 |
% |
|
4 |
% |
Total Revenues |
$ |
723 |
|
$ |
633 |
|
|
14 |
% |
|
5 |
% |
Revenue growth in the Immunocytometry Systems unit was driven by sales of the newly introduced BD FACSCanto and BD FACSArray analyzers and continued strong market acceptance of the BD FACSAria cell sorter, as well as strong growth of cell analysis reagents.
Biosciences operating income was $156 million in 2004 compared with $101 million in 2003, which included
non-cash charges of $27 million, as discussed below. Biosciences 2004 operating income reflected
sales growth resulting from new instrument introductions and increased sales of cell analysis reagents.
Geographic Revenues
On a geographic basis, revenues outside the United States in 2004 increased 15% over 2003 to $2.5 billion.
This increase includes an estimated impact of favorable foreign currency translation of 9%. International
sales of safety-engineered devices were approximately $200 million in 2004. International sales growth
was led by strong sales of immunocytometry systems reagents and instruments as well as prefillable
syringes in Europe. Also contributing to the growth were strong sales of respiratory and flu diagnostic
tests in the Diagnostic Systems unit in Japan.
27
Financial Review Becton, Dickinson and Company
Revenues in the United States in 2004 of $2.4 billion increased 6% over 2003, primarily from strong
sales of safety-engineered devices and prefillable syringes. Sales in the Diabetes Care unit included
$40 million related to BGM meters, test strips and related disposables. The Diagnostic Systems unit
reported incremental sales of $10 million over 2003 of the BD ProbeTec ET in the United States.
BGM Charges
We recorded a pre-tax charge of $45 million to Cost of prod-ucts sold in 2004 related to our BGM products.
The charge included a reserve of $6 million in connection with the voluntary product recall of certain
lots of BGM test strips and the write-off of $30 million of certain test strip inventories. In addition,
the charge reflected our decision to focus 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, which decision resulted in a write-off of $9 million
of related blood glucose meters and fixed assets. See Note 19 of the Notes to Consolidated Financial
Statements for further discussion.
Non-Cash Charges
We recorded non-cash charges of $27 million in 2003 in Cost of products sold. These charges resulted
from the decision to discontinue the development of certain products and product applications associated
with the BD IMAGN instrument platform in the Biosciences segment. As a result, we recorded an impairment charge of $27
million for the related intangible assets and inventory. See Note 3 of the Notes to Consolidated
Financial Statements for further discussion.
Gross Profit Margin
Gross profit margin was 49.3% in 2004, which included $45 million of BGM charges, compared with 48.5%
in 2003, which included $27 million of non-cash charges. Gross profit margin primarily reflected
increased sales of products with higher gross profit margins, including safety-engineered products,
BGM products and the BD ProbeTec ET instrument platform. In addition, gross profit margin benefited from approximately $15 million
of savings achieved from the 2002 Medical restructuring plan.
Operating Expenses
SSG&A expense of $1.3 billion in 2004 was 26.6% of revenues, compared to $1.2 billion in 2003,
or 26.5% of revenues. This increase was primarily the result of increased investment in various strategic
initiatives, in particular, blood glucose monitoring products, as well as a weaker U.S. dollar.
R&D in 2004 was $236 million, or 4.8% of revenues, compared with $224 million, or 5% of revenues,
in 2003. Substantially all R&D efforts are in the United States and therefore are not impacted
by foreign currency translation. However, the revenue increase attributable to foreign currency translation
had the effect of decreasing R&D expenses as a percentage of sales.
The litigation settlement of $100 million in 2004, as discussed in Note 16 of the Notes to Consolidated
Financial Statements, related to the pre-tax charge to record the settlement of the litigation brought
by Retractable Technologies, Inc.
Non-Operating Expense and Income
Interest expense was $45 million in 2004, compared with $43 million in 2003. Interest income was $15
million in 2004, compared with $7 million in 2003. This increase was due primarily to interest income
arising from tax refunds received in connection with the conclusion of certain tax examinations during
2004, as well as higher levels of interest-bearing investments.
Income Taxes
The effective tax rate in 2004 was 22.6%, and reflected a 1% benefit relating to the BGM charges and
a 1.5% benefit relating to the litigation settlement. The effective tax rate in 2003 was 23.1%, which
included the impact from the 2003 non-cash charges.
Income and Diluted Earnings per Share
from Continuing Operations
Income from continuing operations and diluted earnings per share from continuing operations in 2004
were $583 million and $2.21, respectively, and included the impact of the BGM charges and litigation
settlement in 2004, which reduced income from continuing operations in the aggregate by $91 million
and diluted earnings per share from continuing operations in 2004 by $.35. Income from continuing
operations and diluted earnings per share from continuing operations in 2003 were $555 million and
$2.10, respectively. Non-cash charges in 2003 reduced income from continuing operations by $16 million
and diluted earnings per share from continuing operations in 2003 by $.06.
28
Financial Review Becton, Dickinson and Company
Liquidity and Capital Resources
Cash Flows from Continuing Operating Activities
Cash provided by continuing operations was $1.1 billion in 2004, compared to $903 million in 2003.
Cash Flows from Continuing Investing Activities
Capital expenditures were $266 million in 2004, compared to $259 million in 2003. Medical and Diagnostics
capital spending, which totaled $159 million and $80 million, respectively, in 2004, included spending
for various capacity expansions as well as for safety devices. Biosciences capital spending, which
totaled $17 million in 2004, included spending on manufacturing capacity expansions.
In the fourth quarter of 2004, we spent approximately $24 million, net of cash acquired, to purchase
Atto Bioscience, Inc. See Note 5 of the Notes to Consolidated Financial Statements for additional
discussion.
Cash Flows from Continuing Financing Activities
Net cash used for financing activities was $507 million in 2004, as compared with $289 million during
2003, and included the repurchase of shares of our common stock for approximately $450 million, compared
with approximately $350 million in 2003. Total debt at September 30, 2004, was $1.2 billion compared
with $1.3 billion at September 30, 2003. Short-term debt declined to 4% of total debt at the end
of 2004, from 9% at the end of 2003. Floating rate debt was 55% of total debt at the end of both
2004 and 2003. Our weighted average cost of total debt at the end of 2004 was 4.3%, up from 3.8%
at the end of 2003 due to higher short-term interest rates. Debt-to-capitalization at September 30,
2004 improved to 28.1% from 30.5% in 2003. Cash and equivalents were $719 million and $520 million
at September 30, 2004 and 2003, respectively.
Critical Accounting Policies
The preparation of the consolidated financial statements requires management to use estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of the consolidated financial statements. Some of
those judgments can be subjective and complex and consequently, actual results could differ from
those estimates. Management bases its estimates and judgments on historical experience and on various
other factors that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. For any given estimate or assumption made by management, there may also
be other estimates or assumptions that are reasonable. However, we believe that given the current
facts and circumstances, it is unlikely that applying any such alternative judgments would materially
impact our consolidated financial statements. Management believes the following critical accounting
policies reflect the more significant judgments and estimates used in the preparation of the consolidated
financial statements.
Revenue Recognition
Revenue from product sales is recognized when title and riskof loss pass to the customer. We recognize
revenue for certain instruments sold from the Biosciences segment upon installation at a customers
site. Based upon terms of the sales agreements, the Biosciences segment recognizes revenue in accordance
with Emerging Issues Task Force No. 00-21, Revenue Arrangements with Multiple Deliverables. These sales agreements have multiple deliverables, and as such are divided into separate units of
accounting. Revenue is recognized upon the completion of each deliverable based on the relative fair
values of items delivered.
BDs domestic businesses sell products primarily to distributors who resell the products to end-user
customers. We provide rebates to distributors that sell to end-user customers at prices determined
under a contract between BD and the end-user customer. Provisions for rebates, as well as sales discounts
and returns, are accounted for as a reduction of revenues when revenue is recognized.
Impairment of Assets
Pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite-lived
intangible assets are subject to impairment reviews at least annually, or whenever indicators of
impairment arise. Intangible assets other than goodwill and indefinite-lived intangible assets and
other long-lived assets are reviewed for impairment in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. Impairment reviews are based on a cash
flow approach that requires significant management judgment with respect to future volume, revenue
and expense growth rates, changes in working capital use, appropriate discount rates and other assumptions
and estimates. The estimates and assumptions used are consistent with BDs business plans. The
use of alternative estimates and assumptions could increase or decrease the estimated fair value
of the asset, and potentially result in different impacts to BDs results of operations. Actual
results may differ from managements estimates.
29
Financial Review Becton, Dickinson and Company
Investments
We hold equity interests in companies having operations or technology in areas within or adjacent to
BDs strategic focus. For some of these companies that are publicly traded, market prices are
available. However, for those companies that are not publicly traded, fair value is difficult to
determine. We write down an investment when management believes an investment has experienced a decline
in value that is other than temporary. Future adverse changes in market conditions or poor operating
results of the underlying investments could result in an inability to recover the carrying value
of the investments, thereby possibly requiring impairment charges in the future.
Tax Valuation Allowances
BD maintains valuation allowances where it is more likely than not that all or a portion of a deferred
tax asset will not be realized. Changes in valuation allowances are included in our tax provision
in the period of change. In determining whether a valuation allowance is warranted, management evaluates
factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods,
and tax strategies that could potentially enhance the likelihood of realization of a deferred tax
asset.
Contingencies
We are involved, both as a plaintiff and a defendant, in various legal proceedings that arise in the
ordinary course of business, including, without limitation, product liability and environmental matters,
as further discussed in Note 12 of the Notes to Consolidated Financial Statements. We assess the
likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable
losses. In accordance with U.S. generally accepted accounting principles, we establish accruals to
the extent probable future losses are estimable (in the case of environmental matters, without considering
possible third-party recoveries). A determination of the amount of accruals, if any, for these contingencies
is made after careful analysis of each individual issue and, when appropriate, is developed after
consultation with outside counsel. The accruals may change in the future due to new developments
in each matter or changes in our strategy in dealing with these matters.
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 view of these uncertainties, we could incur charges in excess of any currently established
accruals 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.
Benefit Plans
We have significant net pension and postretirement benefit costs that are measured using actuarial
valuations. Inherent in these valuations are key assumptions including discount rates and expected
return on plan assets. We evaluate these key assumptions at least annually on a plan- and country-specific
basis. We consider current market conditions, including changes in interest rates and market returns,
in selecting these assumptions. Changes in the related net pension and postretirement benefits costs
may occur in the future due to changes in assumptions.
The discount rate is selected to reflect the prevailing market rate on September 30 based on investment
grade bonds and other factors. We reduced our discount rate for the U.S. pension and postretirement
plans at September 30, 2005 from 6.0% to 5.50% and at September 30, 2004 from 6.25% to 6.0%.
To determine the expected long-term rate of return on pension plan assets, we consider the historical
and expected returns on various plan asset classes, as well as current and expected asset allocations.
At September 30, 2005, the one-year rate of return on assets for our U.S. pension plans was 12.8%,
the five-year rate of return was 3.2%, and the ten-year rate of return was 8.3%. We believe that
these results, in connection with our current and expected asset allocation, support our assumed
long-term return of 8.0% on those assets.
Sensitivity to changes in key assumptions for our U.S. pension and postretirement plans are as follows:
|
Discount rateA change of plus (minus) 25 basis points, with other assumptions held constant,
would have an estimated $7 million favorable (unfavorable) impact on the total U.S. net pension and
postretirement benefit plan cost. |
|
Expected return on plan assetsA change of plus (minus) 25 basis points, with other assumptions
held constant, would have an estimated $2 million favorable (unfavorable) impact on U.S. pension
plan cost. |
Stock-Based Compensation
Effective October 1, 2004, we adopted SFAS No. 123(R). This statement requires compensation cost relating
to share-based payment transactions to be recognized in net income using a fair-value measurement
method.
30
Financial Review Becton, Dickinson and Company
Prior to October 1, 2004, 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 had not recognized any share-based compensation
expense under this method in recent years because we granted stock options at the market price as
of the date of grant.
See discussion in Note 13 of the Notes to Consolidated Financial Statements concerning the Companys
methodology for determining fair value for its share-based awards.
Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995Safe Harbor for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for
forward-looking statements made by or on behalf of BD. BD and its representatives may from time to
time make certain forward-looking statements in publicly released materials, both written and oral,
including statements contained in this report and filings with the Securities and Exchange Commission
and in our other reports to shareholders. Forward-looking statements may be identified by the use
of words like plan, expect, believe, intend, will,
anticipate, estimate and other words of similar meaning in conjunction with,
among other things, discussions of future operations and financial performance, as well as our strategy
for growth, product development, regulatory approvals, market position and expenditures. All statements
that address operating performance or events or developments that we expect or anticipate will occur
in the futureincluding statements relating to volume growth, sales and earnings per share growth
and statements expressing views about future operating resultsare forward-looking statements
within the meaning of the Act.
Forward-looking statements are based on current expectations of future events. The forward-looking
statements are and will be based on 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.
The following are some important factors that could cause our actual results to differ from our expectations
in any forward-looking statements:
|
Regional, national and foreign economic factors, including inflation and fluctuations in interest rates
and foreign currency exchange rates and the potential effect of such fluctuations on revenues, expenses
and resulting margins. |
|
We
operate in a highly competitive environment. New product introductions
by our current or future competitors could adversely affect our ability
to compete in the global market. Patents attained by competitors, particularly
as patents on our products expire, may also adversely impact our competitive
position. While we believe our opportunities for sustained, profitable
growth are considerable, actions of competitors could impact our revenue
growth and earnings. |
|
Recently, it has been reported that the U.S. Food and Drug Administration (FDA) advisory
panel has recommended approval by the FDA of a new inhaled form of insulin, which, if approved, could
adversely impact sales of our insulin injection devices. However, we believe that any impact would
be mitigated by certain factors, including the convenience and efficacy of insulin injections, the
high degree of satisfaction with insulin needles by patients who inject insulin, and our expectation
that many insulin injectors would need to continue to inject at least once per day to control their
blood sugar levels, even when inhaled insulin is used. |
|
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 that we may undertake.
|
31
Financial Review Becton, Dickinson and Company
|
Adoption of or changes in government laws and regulations affecting domestic and foreign operations,
including those relating to trade, monetary and fiscal policies, taxation, environmental matters,
sales practices, price controls, licensing and regulatory approval of new products, or changes in
enforcement practices with respect to any such laws and regulations. |
|
Fluctuations in U.S. and international governmental funding and policies for life science research.
|
|
Difficulties inherent in product development, including the potential inability to successfully continue
technological innovation, complete clinical trials, obtain regulatory approvals in the United States
and abroad, or gain and maintain market approval of products, as well as the possibility of encountering
infringement claims by competitors with respect to patent or other intellectual property rights,
all of which can preclude or delay commercialization of a product. |
|
Pending and potential litigation or other proceedings adverse to BD, including antitrust claims, product
liability claims, and patent infringement claims, as well as other risks and uncertainties detailed
from time to time in our Securities and Exchange Commission (SEC) 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 FDA (or foreign counterparts) or declining sales. |
|
Economic and political conditions in international markets, including civil unrest, governmental changes and restrictions on the ability to transfer capital across borders. |
|
The effects of natural disasters, including hurricanes or pandemic diseases, on our ability to manufacture our products, particularly where production of a product line is concentrated in one or more plants, or on our ability to source components from suppliers that are needed for such manufacturing. |
|
Our ability to penetrate developing and emerging markets, which also depends on economic and political conditions, and how well we are able to acquire or form strategic business alliances with local companies and make necessary infrastructure enhancements to production facilities, distribution networks, sales equipment and technology. |
|
The impact of business combinations, including acquisitions and divestitures, both internally for BD and externally in the healthcare industry. |
|
Issuance of new or revised accounting standards by the Financial Accounting Standards Board or the SEC. |
The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve
results described in any forward-looking statements. Investors should understand that it is not possible
to predict or identify all such factors and should not consider this list to be a complete statement
of all potential risks and uncertainties.
32
|
|
|
Becton, Dickinson and Company |
Reports of Management |
|
Managements Responsibilities
The following financial statements have been prepared by management in conformity with U.S. generally
accepted accounting principles and include, where required, amounts based on the best estimates and
judgments of management. The integrity and objectivity of data in the financial statements and elsewhere
in this Annual Report are the responsibility of management.
In fulfilling its responsibilities for the integrity of the data presented and to safeguard the Companys
assets, management employs a system of internal accounting controls designed to provide reasonable
assurance, at appropriate cost, that the Companys assets are protected and that transactions
are appropriately authorized, recorded and summarized. This system of control is supported by the
selection of qualified personnel, by organizational assignments that provide appropriate delegation
of authority and division of responsibilities, and by the dissemination of written policies and procedures.
This control structure
is further reinforced by a program of internal audits, including a policy
that requires responsive action by management.
The Board of Directors monitors the internal control system, including internal accounting and financial
reporting controls, through its Audit Committee, which consists of five independent Directors. The
Audit Committee meets periodically with the independent registered public accounting firm, the internal
auditors and management to review the work of each and to satisfy itself that they are properly discharging
their responsibilities. The independent registered public accounting firm and the internal auditors
have full and free access to the Audit Committee and meet with its members, with and without management
present, to discuss the scope and results of their audits including internal control, auditing and
financial reporting matters.
Managements Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control
over financial reporting, as defined in Rule 13a-15(f) under the Securities
Act of 1934. Management conducted an assessment of the effectiveness of internal
control over financial reporting based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on this assessment and those
criteria, management concluded that internal control over financial reporting
was effective as of September 30, 2005.
The financial statements and internal control over financial reporting have been audited by Ernst &
Young LLP, an independent registered public accounting firm. Ernst & Youngs reports with
respect to fairness of presentation of the statements, managements assessment, and the effectiveness
of internal control over financial reporting are included herein.
|
|
|
|
|
|
|
|
|
|
|
Edward J. Ludwig
Chairman, President and
Chief Executive Officer |
|
John R. Considine
Executive Vice President
and
Chief Financial Officer |
|
William A. Tozzi
Vice President and
Controller |
33
|
|
|
Becton, Dickinson and Company |
Report of Independent Registered
Public Accounting Firm |
|
To the Shareholders and Board of Directors of
Becton, Dickinson and Company
We have audited the accompanying consolidated balance sheets of Becton, Dickinson and Company as of
September 30, 2005 and 2004, and the related consolidated statements of income, comprehensive income,
and cash flows for each of the three years in the period ended September 30, 2005. These financial
statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Becton, Dickinson and Company at September 30, 2005 and 2004,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.
As
discussed in Notes 2 and 13 to the consolidated financial statements, effective
October 1, 2004, the Company adopted Financial Accounting Standard No. 123(R),
Share-Based Payment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Becton, Dickinson and Companys internal control over
financial reporting as of September 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
November 18, 2005, expressed an unqualified opinion thereon.
|
|
|
|
|
ERNST & YOUNG LLP
New York, New York
November 18, 2005
|
34
|
|
|
Becton, Dickinson and Company |
Report of Independent Registered
Public Accounting Firm |
|
To the Shareholders and Board of Directors of
Becton, Dickinson and Company
We have audited managements assessment, included in the accompanying Managements Report
on Internal Control Over Financial Reporting, that Becton, Dickinson and Company maintained effective
internal control over financial reporting as of September 30, 2005, based on criteria established
in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Becton, Dickinson and Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment
and an opinion on the effectiveness of the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Becton, Dickinson and Company maintained effective
internal control over financial reporting as of September 30, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Becton, Dickinson and Company maintained,
in all material respects, effective internal control over financial reporting as of September 30,
2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Becton, Dickinson and Company as of September
30, 2005 and 2004, and the related consolidated statements of income, comprehensive income and cash
flows for each of the three years in the period ended September 30, 2005 and our report dated November
18, 2005 expressed an unqualified opinion thereon.
|
|
|
|
|
ERNST & YOUNG LLP
New York, New York
November 18, 2005
|
35
|
|
|
Becton, Dickinson and Company |
Financial Statements |
|
Consolidated Statements of Income
Years Ended September 30
Thousands of dollars, except per-share amounts
|
2005 |
|
|
|
2004 |
|
2003 |
|
Operations |
|
|
|
|
|
|
|
|
|
|
Revenues |
$ |
5,414,681 |
|
|
$ |
4,934,745 |
|
$ |
4,463,509 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold |
|
2,662,029 |
|
|
|
2,500,362 |
|
|
2,296,637 |
|
Selling and administrative expense |
|
1,449,856 |
|
|
|
1,311,467 |
|
|
1,181,403 |
|
Research and development expense |
|
271,626 |
|
|
|
235,649 |
|
|
224,237 |
|
Litigation settlement |
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Costs and Expenses |
|
4,383,511 |
|
|
|
4,147,478 |
|
|
3,702,277 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
1,031,170 |
|
|
|
787,267 |
|
|
761,232 |
|
Interest expense |
|
(55,673 |
) |
|
|
(44,832 |
) |
|
(43,477 |
) |
Interest income |
|
36,421 |
|
|
|
15,225 |
|
|
6,928 |
|
Other expense, net |
|
(7,064 |
) |
|
|
(4,792 |
) |
|
(2,725 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income From Continuing Operations
Before Income Taxes |
|
1,004,854 |
|
|
|
752,868 |
|
|
721,958 |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
312,571 |
|
|
|
170,364 |
|
|
167,028 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
692,283 |
|
|
|
582,504 |
|
|
554,930 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from Discontinued Operations
Net of income tax benefit of
$14,439, $7,961 and $4,378 |
|
29,980 |
|
|
|
(115,102 |
) |
|
(7,874 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
$ |
722,263 |
|
|
$ |
467,402 |
|
$ |
547,056 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
$ |
2.75 |
|
|
$ |
2.30 |
|
$ |
2.17 |
|
Income (loss) from Discontinued Operations |
$ |
0.12 |
|
|
$ |
(0.46 |
) |
$ |
(0.03 |
) |
Basic Earnings Per Share(A) |
$ |
2.87 |
|
|
$ |
1.85 |
|
$ |
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
$ |
2.66 |
|
|
$ |
2.21 |
|
$ |
2.10 |
|
Income (loss) from Discontinued Operations |
$ |
0.11 |
|
|
$ |
(0.44 |
) |
$ |
(0.03 |
) |
Diluted Earnings Per Share |
$ |
2.77 |
|
|
$ |
1.77 |
|
$ |
2.07 |
|
(A) |
Total per share amounts may not add due to rounding. |
See notes to consolidated financial statements |
36
Financial Statements Becton, Dickinson and Company
Consolidated Statements of Comprehensive Income
Years Ended September 30
Thousands of dollars
|
2005 |
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
$ |
722,263 |
|
|
$ |
467,402 |
|
$ |
547,056 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive (Loss) Income, Net of Tax |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
(17,742 |
) |
|
|
83,522 |
|
|
207,107 |
|
Minimum pension liability adjustment |
|
4,494 |
|
|
|
(6,730 |
) |
|
(9,248 |
) |
Unrealized (loss) gain on investments, net of amounts recognized |
|
(1,112 |
) |
|
|
242 |
|
|
9,653 |
|
Unrealized loss on cash flow hedges, net of amounts realized |
|
(135 |
) |
|
|
(2,461 |
) |
|
(5,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive (Loss) Income, Net of Tax |
|
(14,495 |
) |
|
|
74,573 |
|
|
202,013 |
|
Comprehensive Income |
$ |
707,768 |
|
|
$ |
541,975 |
|
$ |
749,069 |
|
See notes to consolidated financial statements |
37
Financial Statements Becton, Dickinson and Company.
Consolidated Balance Sheets
Years Ended September 30
Thousands of dollars, except per-share amounts and numbers of shares
|
2005 |
|
|
2004 |
|
Assets |
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
Cash and equivalents |
$ |
1,042,890 |
|
|
$ |
719,378 |
|
Short-term investments |
|
86,808 |
|
|
|
32,119 |
|
Trade receivables, net |
|
842,806 |
|
|
|
807,380 |
|
Inventories |
|
775,949 |
|
|
|
738,778 |
|
Prepaid expenses, deferred taxes and other |
|
226,861 |
|
|
|
279,985 |
|
Assets held for sale |
|
|
|
|
|
63,694 |
|
Total Current Assets |
|
2,975,314 |
|
|
|
2,641,334 |
|
Property, Plant and Equipment, Net |
|
1,933,718 |
|
|
|
1,880,997 |
|
Goodwill |
|
470,049 |
|
|
|
473,211 |
|
Core and Developed Technology, Net |
|
165,381 |
|
|
|
188,541 |
|
Other Intangibles, Net |
|
101,558 |
|
|
|
93,466 |
|
Capitalized Software, Net |
|
229,793 |
|
|
|
283,918 |
|
Other |
|
196,156 |
|
|
|
191,112 |
|
Total Assets |
$ |
6,071,969 |
|
|
$ |
5,752,579 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
Short-term debt |
$ |
206,509 |
|
|
$ |
49,289 |
|
Accounts payable |
|
252,262 |
|
|
|
206,941 |
|
Accrued expenses |
|
439,894 |
|
|
|
384,936 |
|
Salaries, wages and related items |
|
329,864 |
|
|
|
307,996 |
|
Income taxes |
|
70,846 |
|
|
|
86,739 |
|
Liabilities held for sale |
|
|
|
|
|
14,181 |
|
Total Current Liabilities |
|
1,299,375 |
|
|
|
1,050,082 |
|
Long-Term Debt |
|
1,060,833 |
|
|
|
1,171,506 |
|
Long-Term Employee Benefit Obligations |
|
301,933 |
|
|
|
374,222 |
|
Deferred Income Taxes and Other |
|
125,876 |
|
|
|
88,906 |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
|
|
|
|
|
ESOP convertible preferred stock$1 par value: authorized1,016,949 shares;
issued and outstanding527,819 shares in 2004 |
|
|
|
|
|
31,142 |
|
Preferred stock, series A - $1 par value: authorized500,000 shares; none issued |
|
|
|
|
|
|
|
Common stock$1 par value: authorized640,000,000 shares;
issued332,662,160 shares in 2005 and 2004 |
|
332,662 |
|
|
|
332,662 |
|
Capital in excess of par value |
|
615,846 |
|
|
|
414,515 |
|
Retained earnings |
|
4,805,852 |
|
|
|
4,264,778 |
|
Deferred compensation |
|
10,280 |
|
|
|
10,222 |
|
Common stock in treasuryat cost84,977,933 shares in 2005
and 83,327,295 shares in 2004 |
|
(2,297,493 |
) |
|
|
(1,816,756 |
) |
Accumulated other comprehensive loss |
|
(183,195 |
) |
|
|
(168,700 |
) |
Total Shareholders Equity |
|
3,283,952 |
|
|
|
3,067,863 |
|
Total Liabilities and Shareholders Equity |
$ |
6,071,969 |
|
|
$ |
5,752,579 |
|
See notes to consolidated financial statements |
38
Financial Statements Becton, Dickinson and Company
Consolidated Statements of Cash Flows
Years Ended September 30
Thousands of dollars
|
2005 |
|
|
2004 |
|
2003 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
Net income |
$ |
722,263 |
|
|
$ |
467,402 |
|
$ |
547,056 |
|
(Income) loss from discontinued operations, net |
|
(29,980 |
) |
|
|
115,102 |
|
|
7,874 |
|
Income from continuing operations, net |
|
692,283 |
|
|
|
582,504 |
|
|
554,930 |
|
Adjustments to income from continuing operations to
derive net cash provided by continuing operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
387,496 |
|
|
|
357,224 |
|
|
335,759 |
|
Share-based compensation |
|
70,199 |
|
|
|
2,466 |
|
|
|
|
Deferred income taxes |
|
63,229 |
|
|
|
(31,345 |
) |
|
5,921 |
|
BGM charges |
|
|
|
|
|
38,551 |
|
|
|
|
Change in operating assets: |
|
|
|
|
|
|
|
|
|
|
Trade receivables |
|
(41,618 |
) |
|
|
(15,854 |
) |
|
31,450 |
|
Inventories |
|
(44,346 |
) |
|
|
30,096 |
|
|
(49,854 |
) |
Prepaid expenses, deferred taxes and other |
|
12,636 |
|
|
|
(2,466 |
) |
|
8,596 |
|
Accounts payable, income taxes and other liabilities |
|
142,254 |
|
|
|
99,447 |
|
|
65,500 |
|
Pension obligation |
|
(58,842 |
) |
|
|
48,045 |
|
|
(47,382 |
) |
Other, net |
|
638 |
|
|
|
(5,942 |
) |
|
(1,987 |
) |
Net Cash Provided by Continuing Operating Activities |
|
1,223,929 |
|
|
|
1,102,726 |
|
|
902,933 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
(317,628 |
) |
|
|
(265,718 |
) |
|
(259,218 |
) |
Capitalized software |
|
(18,922 |
) |
|
|
(39,190 |
) |
|
(64,782 |
) |
Change in short-term investments |
|
(43,775 |
) |
|
|
(31,298 |
) |
|
1,975 |
|
Purchases of long-term investments |
|
(1,171 |
) |
|
|
(10,149 |
) |
|
(4,399 |
) |
Acquisition of business, net of cash acquired |
|
|
|
|
|
(24,251 |
) |
|
|
|
Proceeds from discontinued operations |
|
62,051 |
|
|
|
|
|
|
|
|
Other, net |
|
(62,566 |
) |
|
|
(24,628 |
) |
|
(21,987 |
) |
Net Cash Used for Continuing Investing Activities |
|
(382,011 |
) |
|
|
(395,234 |
) |
|
(348,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
Change in short-term debt |
|
157,211 |
|
|
|
(56,509 |
) |
|
(319,608 |
) |
Proceeds of long-term debt |
|
|
|
|
|
|
|
|
404,683 |
|
Payment of long-term debt |
|
(104,522 |
) |
|
|
(21,682 |
) |
|
(6,386 |
) |
Repurchase of common stock |
|
(549,999 |
) |
|
|
(449,930 |
) |
|
(349,998 |
) |
Issuance of common stock |
|
123,494 |
|
|
|
173,606 |
|
|
86,618 |
|
Excess tax benefit from stock option exercises |
|
31,545 |
|
|
|
|
|
|
|
|
Dividends paid |
|
(182,236 |
) |
|
|
(152,376 |
) |
|
(104,148 |
) |
Net Cash Used for Continuing Financing Activities |
|
(524,507 |
) |
|
|
(506,891 |
) |
|
(288,839 |
) |
Net Cash Provided by (Used for) Discontinued Operations |
|
2,245 |
|
|
|
(2,726 |
) |
|
(1,003 |
) |
Effect of exchange rate changes on cash and equivalents |
|
3,856 |
|
|
|
1,617 |
|
|
12,091 |
|
Net Increase in Cash and Equivalents |
|
323,512 |
|
|
|
199,492 |
|
|
276,771 |
|
Opening Cash and Equivalents |
|
719,378 |
|
|
|
519,886 |
|
|
243,115 |
|
Closing Cash and Equivalents |
$ |
1,042,890 |
|
|
$ |
719,378 |
|
$ |
519,886 |
|
See notes to consolidated financial statements |
39
Thousands of dollars, except per-share amounts
and numbers of shares
1 |
|
Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of Becton, Dickinson and Company and its
majority-owned subsidiaries (the Company) after the elimination of intercompany transactions.
The Company has no material interests in variable interest entities and none that require consolidation.
Reclassifications
The Company has reclassified certain prior year information to conform with the current year presentation.
Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which approximates market. The Company considers
all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation
and amor-tization are principally provided on the straight-line basis over estimated useful
lives, which range from 20 to 45 years for buildings, four to 10 years for machinery and equipment
and two to 17 years for leasehold improvements. Depreciation expense was $243,355, $221,545 and $217,553
in fiscal 2005, 2004 and 2003, respectively.
Goodwill and Other Intangible Assets
Goodwill is reviewed annually for impairment in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. In reviewing goodwill for impairment, potential impairment is identified by comparing the estimated
fair value of a reporting unit with its carrying value. Core and developed
40
Notes to Consolidated Financial Statements Becton, Dickinson and Company
technology continues to be amortized over periods ranging from 15 to 20 years, using the straight-line
method. Both goodwill and core and developed technology arise from acquisitions. Other intangibles
with finite useful lives, which include patents, are amortized over periods principally ranging from
two to 40 years, using the straight-line method. These intangibles, including core and developed
technology, are periodically reviewed when impairment indicators are present to assess recoverability
from future operations using undiscounted cash flows in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. To the extent carrying value exceeds the
undiscounted cash flows, an impairment loss is recognized in operating results based upon the excess
of the carrying value over fair value. Other intangibles also include certain trademarks that are
considered to have indefinite lives, as they are expected to generate cash flows indefinitely. Therefore,
in accordance with the provisions of SFAS No. 142, these trademarks are no longer amortized but are
reviewed annually for impairment. See Note 3 for further discussion.
Capitalized Software
Capitalized software, including costs capitalized in accordance with the AICPAs Statement of
Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal
Use, is stated at cost, less accumulated amortization. Amortization expense is principally
provided on the straight-line basis over estimated useful lives, which do not exceed 10 years. Amortization
expense was $71,416, $66,319 and $52,602 for 2005, 2004 and 2003, respectively.
Foreign Currency Translation
Generally, the net assets of foreign operations are translated into U.S. dollars using current exchange
rates. The U.S. dollar results that arise from such translation, as well as exchange gains and losses
on intercompany balances of a long-term investment nature, are included in the foreign currency translation
adjustments in Accumulated other comprehensive loss.
Revenue Recognition
Revenue from product sales are recognized when title and risk of loss pass to the customer. For the
sale of certain instruments in the Biosciences segment, revenue is recognized upon completion of
installation at the customers site. Based upon the terms of sales arrangements entered into
beginning in the fourth quarter of 2003, the Biosciences segment began to recognize revenue in accordance
with Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple
Deliverables. These sales arrangements have multiple deliverables and, as such, are divided
into separate units of accounting. Revenue and cost of products sold are recognized at the completion
of each deliverable based on the relative fair values of items delivered.
The Companys domestic businesses sell products primarily to distributors who resell the products
to end-user customers. Rebates are provided to distributors that sell to end-user customers at prices
determined under a contract between the Company and the end-user customer. Provisions for rebates,
as well as sales discounts and returns, are accounted for as a reduction of revenues when revenue
is recognized.
Shipping and Handling Costs
Shipping and handling costs are included in Selling and administrative expense. Shipping expense was
$219,617, $205,280 and $190,472 in 2005, 2004 and 2003, respectively.
Derivative Financial Instruments
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, all derivatives are recorded in the balance sheet at fair value and changes in fair value
are recognized currently in earnings unless specific hedge accounting criteria are met. See Note
9 for additional discussion on financial instruments.
Derivative financial instruments are utilized by the Company in the management of its foreign currency
and interest rate exposures. The Company hedges its foreign currency exposures by entering into offsetting
forward exchange contracts and currency options, when it deems appropriate. The Company utilizes
interest rate swaps and forward rate agreements to manage its exposure to fluctuating interest rates.
The Company does not use derivative financial instruments for trading or speculative purposes.
41
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Any deferred gains or losses associated with derivative instruments, which on infrequent occasions
may be terminated prior to maturity, are recognized in income in the period in which the underlying
hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or
matures prior to the termination of the related derivative instrument, such instrument would be closed
and the resultant gain or loss would be recognized in income.
Income Taxes
United States income taxes are not provided on undistributed earnings of foreign subsidiaries where
such undistributed earnings are indefinitely reinvested outside the United States. Deferred taxes
are provided for earnings of foreign subsidiaries when those earnings are not considered indefinitely
reinvested. Income taxes are provided and tax credits are recognized based on tax laws enacted at
the dates of the financial statements.
The Company maintains valuation allowances where it is more likely than not that all or a portion of
a deferred tax asset will not be realized. Changes in valuation allowances are included in our tax
provision in the period of change. In determining whether a valuation allowance is warranted, management
evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward
periods and tax strategies that could potentially enhance the likelihood of the realization of a
deferred tax asset.
Earnings Per Share
Basic earnings per share are computed based on the weighted average number of common shares outstanding.
Diluted earnings per share reflect the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions. These estimates or assumptions affect reported
assets, liabilities, revenues and expenses as reflected in the consolidated financial statements.
Actual results could differ from these estimates.
Share-Based Compensation
Effective October 1, 2004, the Company adopted SFAS No. 123 (revised 2004)Share-Based Payment
(SFAS No. 123 (R)). This statement requires compensation expense to be measured based
on the estimated fair value of the share-based awards and recognized in income on a straight-line
basis over the requisite service period, which is generally the vesting period. See Note 2 regarding
the Companys adoption of SFAS No. 123(R).
Prior to October 1, 2004, the Company accounted for share-based compensation under the provisions of
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) using
the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly,
compensation expense for stock options was measured as the excess, if any, of the quoted market price
of the Companys stock at the date of the grant over the exercise price. The Company had not
recognized any stock compensation expense under this method in 2004 and 2003, as the exercise price
of stock options equaled the market value of the Companys stock on the date of grant.
Share-Based Compensation
The Company adopted SFAS No. 123(R) effective October 1, 2004. This statement requires compensation
expense relating to share-based payments to be recognized in net income using a fair-value measurement
method. Under the fair value method, the estimated fair value of awards is charged to income on a
straight-line basis over the requisite service period, which is generally the vesting period. The
Company elected the modified prospective method as prescribed in SFAS No. 123(R) and therefore, prior
periods were not restated. Under the modified prospective method, this statement was applied to new
awards granted after the time of adoption, 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.
The Company granted stock options and restricted stock unit awards in November 2004 under the 2004
Employee and Director Equity-Based Compensation Plan (the 2004 Plan), its new long-term
incentive program. See Note 13 for further discussion.
42
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Share-based compensation expense in 2005 reduced the Companys results of operations as follows:
|
2005 |
|
|
Income From Continuing Operations |
|
|
|
|
Before Income Taxes |
$ |
70,199 |
|
|
Net Income(A) |
$ |
50,258 |
|
|
Basic Earnings Per Share(A) |
$ |
0.20 |
|
|
Diluted Earnings Per Share(A) |
$ |
0.19 |
|
|
(A) |
Share-based compensation attributable to discontinued operations was not material. |
Prior to October 1, 2004, the Company accounted for share-based employee compensation under the provisions
of SFAS No. 123 using the intrinsic value method prescribed by APB No. 25 and related interpretations.
Under the intrinsic value method, no compensation expense was recognized for stock options, as the
exercise price of employee stock options equaled the market value of the Companys stock on
the date of grant. The following pro-forma net income and earnings per share information has been
determined as if the Company had accounted for its share-based compensation awards issued using the
fair value method in 2004 and 2003.
|
|
2004 |
|
2003 |
|
Net Income, as reported |
|
$ |
467,402 |
(A) |
$ |
547,056 |
|
Less share-based compensation expense, net of tax |
|
|
32,027 |
|
|
35,941 |
|
Pro-forma net income |
|
$ |
435,375 |
|
$ |
511,115 |
|
Reported earnings per share: |
|
|
|
|
|
|
|
Basic |
|
$ |
1.85 |
|
$ |
2.14 |
|
Diluted |
|
$ |
1.77 |
|
$ |
2.07 |
|
Pro-forma earnings per share: |
|
|
|
|
|
|
|
Basic |
|
$ |
1.72 |
|
$ |
2.00 |
|
Diluted |
|
$ |
1.66 |
|
$ |
1.95 |
|
(A) |
Includes
$2,466 of share-based compensation expense relating to restricted stock units 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 2004 and 2003: risk-free interest rates of 3.85% and 3.66%, respectively; expected volatility
of 32.5% and 33.2%, respectively; expected dividend yields of 1.16% and 1.21%, respectively; and
expected lives of six years for each year presented. The Black-Scholes model is a trading 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.
Other Postretirement Benefits
The Company adopted Financial Accounting Standards Board Staff Position (FSP) 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act), on a prospective basis effective January 1, 2004. The Act
introduces a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of
retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to
Medicare. This adoption resulted in a reduction of the Companys accumulated postretirement
benefit obligation of $26,409 at October 1, 2003 and a reduction of the net periodic benefit cost
of $3,654 and $2,053 for the years ended September 30, 2005 and 2004, respectively. See Note 4 for
more information about the Companys benefit plans.
3 |
|
Other Intangible Assets |
Other intangible assets at September 30 consisted of:
|
2005 |
|
|
2004 |
|
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Amortized intangible
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Core and developed |
|
|
|
|
|
|
|
|
|
|
|
|
|
technology |
$ |
274,615 |
|
$ |
109,234 |
|
|
$ |
297,342 |
|
$ |
108,801 |
|
Patents, trademarks, |
|
|
|
|
|
|
|
|
|
|
|
|
|
and other |
|
338,391 |
|
|
246,060 |
|
|
|
311,682 |
|
|
229,047 |
|
|
$ |
613,006 |
|
$ |
355,294 |
|
|
$ |
609,024 |
|
$ |
337,848 |
|
Unamortized |
|
|
|
|
|
|
|
|
|
|
|
|
|
intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
$ |
9,227 |
|
|
|
|
|
$ |
10,831 |
|
|
|
|
43
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Intangible amortization expense was $33,405, $31,467 and $31,413 in 2005, 2004 and 2003, respectively. The estimated aggregate amortization expense for the fiscal years ending September 30, 2006 to 2010
are as follows: 2006$32,600; 2007$32,600; 2008$31,500; 2009$29,000; 2010$27,700.
During 2003, the Company decided to discontinue the development of certain products and product applications
associated with the BD IMAGN instrument platform in the Biosciences segment. As a result, the Company recorded an impairment loss
of $26,717 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 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 post-retirement healthcare
and life insurance benefits to qualifying domestic retirees. Postretirement healthcare and life insurance
benefit plans in foreign countries are not material. The measurement date used for the Companys
employee benefit plans is September 30.
Net pension and other postretirement cost included the following components:
|
Pension Plans |
|
Other Postretirement Benefits |
|
|
2005 |
|
|
2004 |
|
2003 |
|
2005 |
|
|
|
2004 |
|
2003 |
|
Service cost |
$ |
61,836 |
|
|
$ |
57,013 |
|
$ |
44,798 |
|
$ |
3,657 |
|
|
$ |
3,510 |
|
$ |
3,159 |
|
Interest cost |
|
66,837 |
|
|
|
62,825 |
|
|
54,072 |
|
|
15,321 |
|
|
|
14,492 |
|
|
14,484 |
|
Expected return on plan assets |
|
(59,372 |
) |
|
|
(51,923 |
) |
|
(47,190 |
) |
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
211 |
|
|
|
180 |
|
|
85 |
|
|
(6,233 |
) |
|
|
(6,233 |
) |
|
(6,233 |
) |
Amortization of loss |
|
22,951 |
|
|
|
17,586 |
|
|
13,121 |
|
|
6,164 |
|
|
|
4,116 |
|
|
3,342 |
|
Amortization of net obligation |
|
134 |
|
|
|
132 |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
Net curtailment gain |
|
|
|
|
|
(300 |
) |
|
(147 |
) |
|
|
|
|
|
|
|
|
| |
Net pension and postretirement costs |
$ |
92,597 |
|
|
$ |
85,513 |
|
$ |
64,750 |
|
$ |
18,909 |
|
|
$ |
15,885 |
|
$ |
14,752 | |
44
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Net pension cost attributable to foreign plans included in the preceding table was $16,772, $16,053
and $13,302 in 2005, 2004 and 2003, respectively.
The change in benefit obligation, change in plan assets, funded status and amounts recognized in the
Consolidated Balance Sheets for these plans were as follows:
|
Pension Plans |
|
Other Postretirement Benefits |
|
|
2005 |
|
|
2004 |
|
2005 |
|
|
2004 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at October 1 |
$ |
1,185,394 |
|
|
$ |
1,058,645 |
|
$ |
263,678 |
|
|
$ |
255,106 |
|
Service cost |
|
61,836 |
|
|
|
57,013 |
|
|
3,657 |
|
|
|
3,510 |
|
Interest cost |
|
66,837 |
|
|
|
62,825 |
|
|
15,321 |
|
|
|
14,492 |
|
Plan amendments |
|
195 |
|
|
|
761 |
|
|
|
|
|
|
|
|
Benefits paid |
|
(57,818 |
) |
|
|
(55,401 |
) |
|
(22,279 |
) |
|
|
(18,282 |
) |
Actuarial loss |
|
164,161 |
|
|
|
46,726 |
|
|
20,820 |
|
|
|
35,261 |
|
Other, includes translation |
|
(7,513 |
) |
|
|
14,825 |
|
|
|
|
|
|
(26,409 |
)(A) |
Benefit obligation at September 30 |
$ |
1,413,092 |
|
|
$ |
1,185,394 |
|
$ |
281,197 |
|
|
$ |
263,678 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at October 1 |
$ |
735,167 |
|
|
$ |
685,585 |
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
109,778 |
|
|
|
56,018 |
|
|
|
|
|
|
|
|
Employer contribution |
|
151,439 |
|
|
|
37,468 |
|
|
|
|
|
|
|
|
Benefits paid |
|
(57,818 |
) |
|
|
(55,401 |
) |
|
|
|
|
|
|
|
Other, includes translation |
|
(4,646 |
) |
|
|
11,497 |
|
|
|
|
|
|
| |
Fair value of plan assets at September 30 |
$ |
933,920 |
|
|
$ |
735,167 |
|
$ |
|
|
|
$ |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at September 30: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded benefit obligation |
$ |
(479,172 |
) |
|
$ |
(450,227 |
) |
$ |
(281,197 |
) |
|
$ |
(263,678 |
) |
Unrecognized net transition obligation |
|
(904 |
) |
|
|
1,150 |
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
6,154 |
|
|
|
4,321 |
|
|
(19,153 |
) |
|
|
(25,386 |
) |
Unrecognized net actuarial loss |
|
509,765 |
|
|
|
420,678 |
|
|
106,811 |
|
|
|
93,033 | |
Prepaid (accrued) benefit cost |
$ |
35,843 |
|
|
$ |
(24,078 |
) |
$ |
(193,539 |
) |
|
$ |
(196,031 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated
Balance Sheets at September 30 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost |
$ |
39,005 |
|
|
$ |
25,857 |
|
$ |
|
|
|
$ |
|
|
Intangible asset |
|
1,327 |
|
|
|
1,168 |
|
|
|
|
|
|
|
|
Accrued benefit liability |
|
(148,403 |
) |
|
|
(201,650 |
) |
|
(193,539 |
) |
|
|
(196,031 |
) |
Accumulated other comprehensive loss
before income taxes |
|
143,914 |
|
|
|
150,547 |
|
|
|
|
|
|
| |
Net amount recognized |
$ |
35,843 |
|
|
$ |
(24,078 |
) |
$ |
(193,539 |
) |
|
$ |
(196,031 | ) |
(A) |
Relates to the adoption of FSP 106-2 as discussed in Note 2. |
45
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Foreign pension plan assets at fair value included in the preceding table were $261,841 and $207,765
at September 30, 2005 and 2004, respectively. The foreign pension plan projected benefit obligations
were $339,466 and $279,029 at September 30, 2005 and 2004, respectively.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for
the pension plans with accumulated benefit obligations in excess of plan assets were $1,149,504,
$840,405 and $695,635, respectively as of September 30, 2005 and $1,034,223, $796,256 and $597,155,
respectively as of September 30, 2004.
The assumptions used in determining pension plan information were as follows:
|
2005 |
|
|
2004 |
|
2003 |
|
Net Cost |
|
|
|
|
|
|
|
|
|
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
U.S. plans(A) |
|
6.00 |
% |
|
|
6.25 |
% |
|
6.75 |
% |
Foreign plans (average) |
|
4.95 |
|
|
|
4.90 |
|
|
5.18 |
|
Expected return on plan assets:
U.S. plans |
|
8.00 |
|
|
|
8.00 |
|
|
8.00 |
|
Foreign plans (average) |
|
6.60 |
|
|
|
6.72 |
|
|
7.15 |
|
Rate of compensation increase:
U.S. plans(A) |
|
4.25 |
|
|
|
4.25 |
|
|
4.00 |
|
Foreign plans (average) |
|
2.98 |
|
|
|
2.92 |
|
|
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation |
|
|
|
|
|
|
|
|
|
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
U.S. plans(A) |
|
5.50 |
|
|
|
6.00 |
|
|
6.25 |
|
Foreign plans (average) |
|
4.19 |
|
|
|
4.95 |
|
|
4.90 |
|
Rate of compensation increase: |
|
|
|
|
|
|
|
|
|
|
U.S. plans(A) |
|
4.25 |
|
|
|
4.25 |
|
|
4.25 |
|
Foreign plans (average) |
|
2.92 |
|
|
|
2.98 |
|
|
2.92 | |
(A) |
Also
used to determine other postretirement benefit plan information. |
At September 30, 2005 the assumed healthcare trend rates were 10% pre and post age 65, gradually decreasing
to an ultimate rate of 5% beginning in 2011. At September 30, 2004 the corresponding assumed healthcare
trend rates were 10% pre and post age 65, gradually decreasing to an ultimate rate
of 5% beginning
in 2010. A one percentage point increase in assumed healthcare cost trend rates in each year would
increase the accumulated postretirement benefit obligation as of September 30, 2005 by $14,404 and
the aggregate of the service cost and interest cost components of 2005 annual expense by $821. A
one percentage point decrease in the assumed healthcare cost trend rates in each year would decrease
the accumulated postretirement benefit obligation as of September 30, 2005 by $12,802 and the aggregate
of the 2005 service cost and interest cost by $713.
Expected Funding
The Companys funding policy for its defined benefit pension plans is to contribute amounts sufficient
to meet legal funding requirements, plus any additional amounts that may be appropriate considering
the funded status of the plans, tax consequences, the cash flow generated by the Company and other
factors. While the Company will not be required to fund any of its pension plans in 2006, the Company
made a discretionary contribution to its U.S. pension plan in October 2005 of $150 million.
Expected benefit payments are as follows:
|
Pension
Plans |
|
Other
Postretirement
Benefits |
|
2006 |
$ |
67,230 |
|
$ |
21,652 |
|
2007 |
|
61,005 |
|
|
21,983 |
|
2008 |
|
66,919 |
|
|
22,316 |
|
2009 |
|
76,686 |
|
|
22,593 |
|
2010 |
|
83,315 |
|
|
22,848 |
|
20112015 |
|
562,418 |
|
|
113,917 |
|
Expected receipts of the subsidy under the Act, as discussed in Note 2, which are not reflected in
the expected other post-retirement benefit payments included in the preceding table, are as follows:
2006, $2,378; 2007, $2,275; 2008, $2,296; 2009, $2,287; 2010, $2,245; 20112015, $10,272.
46
Notes to Consolidated Financial Statements Becton, Dickinson and Company
The Companys asset allocation for its defined benefit pension plans at September 30 were as follows:
|
2005 |
|
|
2004 |
|
Equity securities |
|
63.0 |
% |
|
|
66.9 |
% |
Debt securities |
|
34.1 |
|
|
|
30.1 |
|
Other |
|
2.9 |
|
|
|
3.0 | |
Total |
|
100.0 |
% |
|
|
100.0 | % |
Investment Strategy
The Companys investment objective is to achieve superior returns on plan assets, subject to a
prudent level of portfolio risk, for the purpose of enhancing the security of benefits for participants.
The Companys investments include a broad range of equity and fixed income securities. These
investments are diversified in terms of domestic and international equity securities, short-term
and long-term securities, growth and value styles, as well as small and large capitalization stocks.
The Companys target allocation percentages are as follows: equity securities (58%69%);
fixed-income securities (31%39%); and cash (0%3%). Equity securities are held for their
expected high return and excess return over inflation. Fixed-income securities are held for diversification
relative to equities. The plans may also hold cash to meet liquidity requirements. Due to short-term
fluctuations in market conditions, allocation percentages may temporarily deviate from these target
allocation percentages before a rebalancing occurs. Investment risks and returns are measured and
monitored on an on-going basis through annual liability measurements and quarterly investment portfolio
reviews to determine whether the asset allocation targets continue to represent an appropriate balance
of expected risk and reward.
The expected rate of return on plan assets is based upon expectations of long-term average rates of
return to be achieved by the underlying investment portfolios. In establishing this assumption, the
Company considers historical and expected rates of return for the asset classes in which the plans
assets are invested, as well as current economic and capital market conditions.
The Company utilizes a service-based approach in applying the provisions of SFAS No. 112, Employers
Accounting for Postemployment Benefits, for most of its postemployment benefits. This approach
recognizes that actuarial gains and losses may result from experience that differs from baseline
assumptions. Postemployment benefit costs were $22,680, $17,295 and $11,561 in 2005, 2004 and 2003,
respectively.
In July 2004, the Company acquired all of the outstanding equity interests 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 $25,800
in cash. The purchase price has been allocated to assets acquired and liabilities assumed based on
estimated fair values as follows:
Inventories |
$ |
1,780 |
|
Property, plant and equipment |
|
972 |
|
Core and developed technology |
|
5,400 |
|
Goodwill |
|
15,569 |
|
Other assets, net |
|
979 |
|
In connection with this acquisition, a charge of $1,100 was recorded in connection with purchased in-process
research and development. The results of operations of the acquired company were included in the
consolidated results of the Company from the acquisition date. Unaudited pro forma consolidated results,
after giving effect to this acquisition, would not have been materially different from the reported
amounts.
47
Notes to Consolidated Financial Statements Becton, Dickinson and Company
The provision for income taxes from continuing operations consisted of:
|
2005 |
|
|
2004 |
|
2003 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
120,172 |
|
|
$ |
91,669 |
|
$ |
103,825 |
|
State and local, including Puerto Rico |
|
4,269 |
|
|
|
3,362 |
|
|
3,880 |
|
Foreign |
|
124,901 |
|
|
|
106,678 |
|
|
53,402 | |
|
|
249,342 |
|
|
|
201,709 |
|
|
161,107 | |
Deferred: |
|
|
|
|
|
|
|
|
|
|
Domestic |
|
75,948 |
|
|
|
(4,308 |
) |
|
6,209 |
|
Foreign |
|
(12,719 |
) |
|
|
(27,037 |
) |
|
(288 | ) |
|
|
63,229 |
|
|
|
(31,345 |
) |
|
5,921 | |
|
$ |
312,571 |
|
|
$ |
170,364 |
|
$ |
167,028 | |
The components of Income From Continuing Operations Before Income Taxes consisted of:
|
2005 |
|
|
2004 |
|
2003 |
|
Domestic, including Puerto Rico |
$ |
433,670 |
|
|
$ |
291,973 |
|
$ |
355,032 |
|
Foreign |
|
571,184 |
|
|
|
460,895 |
|
|
366,926 | |
|
$ |
1,004,854 |
|
|
$ |
752,868 |
|
$ |
721,958 | |
In accordance with SFAS No. 109, Accounting for Income Taxes, deferred tax assets and liabilities
are netted on the balance sheet by separate tax jurisdictions. At September 30, 2005 and 2004, net
current deferred tax assets of $75,382 and $100,605, respectively, were included in Prepaid expenses,
deferred taxes and other. There were no net non-current deferred tax assets in 2005 and 2004. Net
current deferred tax liabilities of $1,949 and $1,346, respectively, were included in Current Liabilities Income taxes. Net non-current deferred tax liabilities of $98,007 and $61,819, respectively, were
included in Deferred
Income Taxes and Other. Deferred taxes are not provided on substantially all
undistributed earnings of foreign subsidiaries that are indefinitely reinvested. At September 30,
2005, the cumulative amount of such undistributed earnings indefinitely reinvested outside the United
States was $655,617. Determining the tax liability that would arise if these earnings were remitted
is not practicable. Deferred taxes are provided for earnings outside the United States when those
earnings are not considered indefinitely reinvested.
In October 2004, the American Jobs Creations Act of 2004 (the AJCA) was signed into law.
The AJCA creates a temporary incentive for U.S. multinationals to repatriate accumulated income earned
outside the United States. As a result of the passage of the AJCA, the Company revisited its policy
of indefinite reinvestment of foreign earnings and determined that it will repatriate approximately
$1.3 billion in 2006. The Company recorded a one-time charge of $77,200 in the fourth quarter of
2005 attributable to the planned repatriation of these earnings.
Deferred income taxes at September 30 consisted of:
|
2005 |
|
|
2004 |
|
|
Assets |
|
Liabilities |
|
|
Assets |
|
Liabilities |
|
Compensation and benefits |
$ |
154,085 |
|
$ |
|
|
|
$ |
170,148 |
|
$ |
|
|
Property and equipment |
|
|
|
|
147,188 |
|
|
|
|
|
|
141,382 |
|
Repatriation of foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings under the AJCA |
|
|
|
|
77,200 |
|
|
|
|
|
|
|
|
Loss and credit carryforwards |
|
78,806 |
|
|
|
|
|
|
33,552 |
|
|
|
|
Other |
|
178,244 |
|
|
139,205 |
|
|
|
127,200 |
|
|
124,723 | |
|
|
411,135 |
|
|
363,593 |
|
|
|
330,900 |
|
|
266,105 |
|
Valuation allowance |
|
(72,116 |
) |
|
|
|
|
|
(27,355 |
) |
|
| |
|
$ |
339,019 |
|
$ |
363,593 |
|
|
$ |
303,545 |
|
$ |
266,105 | |
48
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Valuation allowances have been established for capital loss carryforwards, state deferred tax assets,
net of federal tax, related to net operating losses and credits and other deferred tax assets for
which the Company has determined it is more likely than not that these benefits will not be realized.
At September 30, 2005, the Company had deferred state tax assets for net state operating losses and
credit carryforwards of $30,667 for which a valuation allowance has been established due to the uncertainty
of generating sufficient taxable income in the state jurisdictions to utilize the deferred tax assets
before they principally expire between 2006 and 2012. The Company also has federal and state capital
loss carryforward deferred tax assets of $37,626 for which a full valuation allowance has been established
due to the uncertainty of recognizing the benefit from these losses before they principally expire in 2010.
A reconciliation of the federal statutory tax rate to the Companys effective tax rate was as
follows:
|
2005 |
|
|
2004 |
|
2003 |
|
Federal statutory tax rate |
|
35.0 |
% |
|
|
35.0 |
% |
|
35.0 |
% |
State and local income taxes,
net of federal tax benefit |
|
0.6 |
|
|
|
0.3 |
|
|
0.4 |
|
Effect of foreign and Puerto Rico
earnings and foreign tax credits |
|
(10.3 |
) |
|
|
(9.9 |
) |
|
(8.4 |
) |
Effect of Research, Empowerment
Zone, Extraterritorial Income
tax benefits
|
|
(2.0 |
) |
|
|
(2.5 |
) |
|
(3.0 |
) |
Repatriation of foreign earnings
under the AJCA |
|
7.7 |
|
|
|
|
|
|
|
|
Other, net |
|
0.1 |
|
|
|
(0.3 |
) |
|
(0.9 |
) |
|
|
31.1 |
% |
|
|
22.6 |
% |
|
23.1 |
% |
The approximate dollar and diluted earnings per share amounts of tax reductions related to tax holidays
in various countries in which the Company does business were: 2005$75,150 and $0.29; 2004$55,461
and $0.21; and 2003$42,050 and $0.16. The tax holidays expire at various dates through 2023.
The Company made income tax payments, net of refunds, of $183,867 in 2005, $146,574 in 2004 and $110,739
in 2003.
7 |
|
Supplemental Financial Information |
Other Expense, Net
Other expense, net in 2005 totaled $7,064, which included foreign exchange losses (net of hedging costs)
of $3,976 and net write downs of certain investments of $3,519.
Other expense, net in 2004 totaled $4,792, which included write downs and losses on certain investments
of $6,951. These amounts were partially offset by gains on the sale of certain investments of $1,293.
Other expense, net in 2003 totaled $2,725, which included write downs of certain investments of $3,030
and the write-off of intangible assets of $1,841. These charges were partially offset by foreign
exchange gains of $1,875 (net of hedging costs).
Trade Receivables, Net
Allowances for doubtful accounts and cash discounts netted against trade receivables were $47,609 and
$52,361 at September 30, 2005 and 2004, respectively.
Inventories
|
2005 |
|
|
2004 |
|
Materials |
$ |
93,963 |
|
|
$ |
96,020 |
|
Work in process |
|
139,772 |
|
|
|
132,841 |
|
Finished products |
|
542,214 |
|
|
|
509,917 |
|
|
$ |
775,949 |
|
|
$ |
738,778 |
|
Property, Plant and Equipment, Net
|
2005 |
|
|
2004 |
|
Land |
$ |
69,029 |
|
|
$ |
62,039 |
|
Buildings |
|
1,214,682 |
|
|
|
1,162,327 |
|
Machinery, equipment and fixtures |
|
2,955,716 |
|
|
|
2,811,679 |
|
Leasehold improvements |
|
65,702 |
|
|
|
68,177 | |
|
|
4,305,129 |
|
|
|
4,104,222 |
|
Less allowances for depreciation and amortization |
|
2,371,411 |
|
|
|
2,223,225 |
|
|
$ |
1,933,718 |
|
|
$ |
1,880,997 |
|
49
Notes to Consolidated Financial Statements Becton, Dickinson and Company
The components of Short-term debt consisted of:
|
2005 |
|
|
2004 |
|
Loans payable: |
|
|
|
|
|
|
|
Domestic |
$ |
200,000 |
|
|
$ |
33,100 |
|
Foreign |
|
6,125 |
|
|
|
15,729 |
|
Current portion of long-term debt |
|
384 |
|
|
|
460 |
|
|
$ |
206,509 |
|
|
$ |
49,289 |
|
Domestic loans payable consist of commercial paper. Foreign loans payable consist of short-term borrowings
from financial institutions. The weighted average interest rates for loans payable were 3.8% and
2.1% at September 30, 2005 and 2004, respectively. The Company has 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. Restrictive covenants
include a minimum interest coverage ratio. There were no borrowings outstanding under the facility
at September 30, 2005. In addition, the Company had short-term foreign lines of credit pursuant to
informal arrangements of approximately $207,000 at September 30, 2005, of which $198,000 was unused.
Long-Term Debt consisted of:
|
2005 |
|
|
2004 |
|
Domestic notes due through 2013
(average year-end interest rate:
3.2%2005; 2.3%2004) |
$ |
10,194 |
|
|
$ |
10,415 |
|
Foreign notes due through 2007
(average year-end interest rate:
15.0%2005 and 2004) |
|
34 |
|
|
|
17 |
|
6.90% Notes due October 1, 2006 |
|
99,937 |
|
|
|
102,436 |
|
7.15% Notes due October 1, 2009 |
|
210,153 |
|
|
|
221,381 |
|
4.55% Notes due April 15, 2013 |
|
198,349 |
|
|
|
198,169 |
|
4.90% Notes due April 15, 2018 |
|
207,116 |
|
|
|
199,177 |
|
8.70% Debentures due January 15, 2025 |
|
|
|
|
|
104,861 |
|
7.00% Debentures due August 1, 2027 |
|
168,000 |
|
|
|
168,000 |
|
6.70% Debentures due August 1, 2028 |
|
167,050 |
|
|
|
167,050 |
|
|
$ |
1,060,833 |
|
|
$ |
1,171,506 |
|
On January 15, 2005, the Company 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 at a price of 103.949%. The Company had utilized an interest rate swap (designated 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.
In March 2003, the Company filed a registration statement with the Securities and Exchange Commission
for one or more offerings of debt securities, common stock, warrants, purchase contracts and units,
up to a total dollar amount of $750,000, including $100,000 of securities carried forward from a
registration filed in October 1997. The remaining availability under the March 2003 registration
statement is $350,000.
Long-term debt balances as of September 30, 2005 and 2004 have been impacted by certain interest rate
swaps that have been designated as fair value hedges, as discussed in Note 9.
50
Notes to Consolidated Financial Statements Becton, Dickinson and Company
The aggregate annual maturities of long-term debt during the fiscal years ending September 30, 2007
to 2010 are as follows: 2007$100,344; 2008$393; 2009$414; 2010$210,589.
The Company capitalizes interest costs as a component of the cost of construction in progress. The
following is a summary of interest costs:
|
2005 |
|
|
2004 |
|
2003 |
|
Charged to operations |
$ |
55,673 |
|
|
$ |
44,832 |
|
$ |
43,477 |
|
Capitalized |
|
14,770 |
|
|
|
12,203 |
|
|
10,346 |
|
|
$ |
70,443 |
|
|
$ |
57,035 |
|
$ |
53,823 |
|
Interest paid, net of amounts capitalized, was $68,527 in 2005, $40,730 in 2004 and $32,649 in 2003.
Foreign Exchange Derivatives
The Company uses foreign exchange forward contracts and currency options to reduce the effect of fluctuating
foreign exchange rates on certain foreign currency denominated receivables and payables, third party
product sales and investments in foreign subsidiaries. Gains and losses on the derivatives are intended
to offset gains and losses on the hedged transaction. The Companys foreign currency risk exposure
is in Europe, Asia Pacific, Canada, Japan and Latin America.
The Company hedges substantially all of its transactional foreign exchange exposures, primarily intercompany
payables and receivables, through the use of forward contracts and currency
options with maturities
of less than 12 months. Gains or losses on these contracts are largely offset by gains and losses
on the underlying hedged items. These foreign exchange contracts do not qualify for hedge accounting
under SFAS No. 133.
In addition, the Company enters into option and forward contracts to hedge certain forecasted sales
that are denominated in foreign currencies. These contracts are designated as cash flow hedges, as
defined by SFAS No. 133, and are effective as hedges of these revenues. These contracts are intended
to reduce the risk that the Companys cash flows from certain third party transactions will
be adversely affected by changes in foreign currency exchange rates. Changes in the effective portion
of the fair value of these contracts are included in other comprehensive income until the hedged
sales transactions are recognized in earnings. Once the hedged transaction occurs, the gain or loss
on the contract is recognized from Accumulated other comprehensive loss to revenues. The Company
recorded hedge net losses, exclusive of hedging costs, of $1,876, $9,110 and $1,732 to revenues in
fiscal 2005, 2004 and 2003, respectively. Fiscal 2005, 2004 and 2003 revenues are net of hedging
costs of $17,286, $15,124 and $9,876, respectively, related to the purchased option contracts. The
Company records in Other expense, net, the premium or cost of the forward contracts, which is excluded
from the assessment of hedge effectiveness. The net cost was $236 in fiscal 2005 and the net premium
was $618 and $993 in fiscal 2004 and 2003, respectively. All outstanding contracts that were designated
as cash flow hedges as of September 30, 2005 will mature by September 30, 2006. At September 30,
2005 and 2004, Accumulated other com-prehensive loss included an unrealized gain of $872 and an unrealized
loss of $5,106, respectively, net of tax, relating to foreign exchange derivatives that have been
designated as cash flow hedges.
The Company enters into forward exchange contracts to hedge its net investments in certain foreign
subsidiaries. These forward contracts are designated and effective as net investment hedges, as defined
by SFAS No. 133. The Company recorded losses of $2,390, $3,690 and $15,304 in fiscal 2005, 2004 and
2003, respectively, to foreign currency translation adjustments in other Accumulated comprehensive
loss for the change in the fair value of the contracts.
51
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Interest Rate Derivatives
The Companys policy is to manage interest cost using a mix of fixed and floating rate debt. The
Company has entered into interest rate swaps in which it agrees to exchange, at specified intervals,
the difference between fixed and floating interest amounts calculated by reference to an agreed-upon
notional principal amount. These swaps are designated as either fair value or cash flow hedges, as
defined by SFAS No. 133. For fair value hedges, changes in the fair value of the interest rate swaps
offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
For cash flow hedges, changes in the fair value of the interest rate swaps are offset by amounts
recorded in other comprehensive (loss) income. There was no ineffective portion to the hedges recognized
in earnings during the period. If interest rate derivatives designated as cash flow hedges mature
or are terminated, then the balance in other comprehensive (loss) income attributable to those derivatives
is reclassified into earnings over the remaining life of the hedged debt. The amount that will be
reclassified and recorded in Interest expense, net within the next 12 months is $1,753.
At September 30, 2005 and 2004, Accumulated other comprehensive loss included an unrealized loss of
$13,360 and $7,247, respectively, net of tax, relating to interest rate derivatives that have been
designated as cash flow hedges.
Fair Value of Financial Instruments
Cash equivalents, short-term investments and short-term debt are carried at cost, which approximates
fair value. Equity investments, where a readily determinable market value exists, are classified
as available-for-sale securities. Available-for-sale securities are carried at fair value, with unrecognized
gains and losses reported in other comprehensive income, net of taxes. Losses on available-for-sale
securities are recognized when a loss is determined to be other than temporary or when realized.
In accordance with the provisions of SFAS No. 133, forward exchange contracts and currency options
are recorded at fair value. Fair values were estimated based on market prices, where available, or
dealer quotes. The fair value of certain long-term
debt is based on redemption value. The estimated
fair values of the Companys financial instruments at September 30 were as follows:
|
2005 |
|
|
2004 |
|
|
Carrying
Value |
|
Fair
Value |
|
|
Carrying
Value |
|
Fair
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency options(A) |
$ |
16,172 |
|
$ |
16,172 |
|
|
$ |
8,618 |
|
$ |
8,618 |
|
Forward exchange contracts(A) |
|
|
|
|
|
|
|
|
5,805 |
|
|
5,805 |
|
Interest rate swaps(A) |
|
10,154 |
|
|
10,154 |
|
|
|
30,142 |
|
|
30,142 |
|
Equity investments(B) |
|
24,918 |
|
|
24,918 |
|
|
|
26,661 |
|
|
26,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts(C) |
|
5,558 |
|
|
5,558 |
|
|
|
|
|
|
|
|
Interest rate swaps(C) |
|
63 |
|
|
63 |
|
|
|
10,912 |
|
|
10,912 |
|
Long-term debt |
|
1,060,833 |
|
|
1,113,311 |
|
|
|
1,171,506 |
|
|
1,228,259 | |
|
|
(A) |
Included
in Prepaid expenses, deferred taxes and other. |
|
|
(B) |
Included
in Other non-current assets. |
|
|
(C) |
Included
in Accrued Expenses. |
Concentration of Credit Risk
Substantially all of the Companys trade receivables are due from public and private entities
involved in the healthcare industry. Due to the large size and diversity of the Companys customer
base, concentrations of credit risk with respect to trade receivables are limited. The Company does
not normally require collateral. Short-term investments consist primarily of liquid investments with
high quality financial institutions. The Company is exposed to credit loss in the event of nonperformance
by financial institutions with which it conducts business. However, this loss is limited to the amounts,
if any, by which the obligations of the counterparty to the financial instrument contract exceed
the obligations of the Company. The Company also minimizes exposure to credit risk by dealing with
a diversified group of major financial institutions.
52
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Changes in certain components of shareholders equity were as follows:
|
ESOP
Preferred
Stock
Issued |
|
Common
Stock
Issued at
Par Value
|
|
Capital in
Excess of
Par Value
|
|
Retained
Earnings |
|
Unearned
ESOP
Compensation
|
|
Deferred
Compensation
|
|
Treasury Stock |
|
Shares |
|
Amount |
Balance at September 30, 2002 |
$ |
37,945 |
|
$ |
332,662 |
|
$ |
185,122 |
|
$ |
3,507,349 |
|
$ |
(7,847 |
) |
$ |
8,496 |
|
|
(77,132,248 |
) |
$ |
(1,137,583 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
547,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($.40 per share) |
|
|
|
|
|
|
|
|
|
|
(101,612 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred ($3.835 per share), |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax benefits |
|
|
|
|
|
|
|
|
|
|
(2,201 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plans, net |
|
|
|
|
|
|
|
71,206 |
|
|
|
|
|
|
|
|
|
|
|
5,048,394 |
|
|
45,357 |
|
Business acquisitions |
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
2,487 |
|
|
24 |
|
Common stock held in trusts, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478 |
|
|
(18,440 |
) |
|
(478 |
) |
Reduction in unearned ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,154 |
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,784,200 |
) |
|
(349,998 |
) |
Adjustment for redemption provisions |
|
(3,497 |
) |
|
|
|
|
753 |
|
|
|
|
|
|
|
|
|
|
|
355,125 |
|
|
2,744 |
|
Balance at September 30, 2003 |
$ |
34,448 |
|
$ |
332,662 |
|
$ |
257,178 |
|
$ |
3,950,592 |
|
$ |
(3,693 |
) |
$
|
8,974 |
|
|
(81,528,882 |
) |
$ |
(1,439,934 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
467,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($.60 per share) |
|
|
|
|
|
|
|
|
|
|
(151,093 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred ($3.835 per share), |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax benefits |
|
|
|
|
|
|
|
|
|
|
(2,123 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plans, net |
|
|
|
|
|
|
|
156,478 |
|
|
|
|
|
|
|
|
|
|
|
7,408,051 |
|
|
71,725 |
|
Business acquisitions |
|
|
|
|
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
3,545 |
|
|
35 |
|
Common stock held in trusts, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,248 |
|
|
(17,376 |
) |
|
(1,248 |
) |
Reduction in unearned ESOP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,693 |
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,551,286 |
) |
|
(449,930 |
) |
Adjustment for redemption provisions |
|
(3,306 |
) |
|
|
|
|
710 |
|
|
|
|
|
|
|
|
|
|
|
358,653 |
|
|
2,596 |
|
Balance at September 30, 2004 |
$ |
31,142 |
|
$ |
332,662 |
|
$ |
414,515 |
|
$ |
4,264,778 |
|
$ |
|
|
$ |
10,222 |
|
|
(83,327,295 |
) |
$ |
(1,816,756 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
722,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($.72 per share) |
|
|
|
|
|
|
|
|
|
|
(181,189 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock plans, net |
|
|
|
|
|
|
|
124,220 |
|
|
|
|
|
|
|
|
|
|
|
4,638,097 |
|
|
44,839 |
|
Business acquisitions |
|
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
4,565 |
|
|
45 |
|
Share-based compensation |
|
|
|
|
|
|
|
70,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock held in trusts, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
|
40,472 |
|
|
(58 |
) |
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,711,800 |
) |
|
(549,999 |
) |
Conversion of ESOP preferred stock |
|
(31,142 |
) |
|
|
|
|
6,706 |
|
|
|
|
|
|
|
|
|
|
|
3,378,028 |
|
|
24,436 |
|
Balance at September 30, 2005 |
$ |
|
|
$ |
332,662 |
|
$ |
615,846 |
|
$ |
4,805,852 |
|
$ |
|
|
$ |
10,280 |
|
|
(84,977,933 |
) |
$ |
(2,297,493 |
) |
53
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Common stock held in trusts represents rabbi trusts in connection with deferred compensation under
the Companys employee salary and bonus deferral plan and Directors deferral plan.
Preferred Stock Purchase Rights
In accordance with the Companys shareholder rights plan, each certificate representing a share
of outstanding common stock of the Company also represents one Preferred Stock Purchase Right (a
Right). Each whole Right entitles the registered holder to purchase from the Company
one eight-hundredths of a share of Preferred Stock, Series A, par value $1.00 per share, at a price
of $67.50. The Rights will not become exercisable unless and until, among other things, a third party
acquires 15% or more of the Companys outstanding common stock. The Rights are redeemable under
certain circumstances at $.01 per Right and will expire, unless earlier redeemed, on April 25, 2006.
There are 500,000 shares of preferred stock designated Series A, none of which has been issued.
11 |
|
Other Comprehensive (Loss) Income |
The components of Accumulated other comprehensive loss were as follows:
|
2005 |
|
|
2004 |
|
Foreign currency translation adjustments |
$ |
(90,413 |
) |
|
$ |
(72,671 |
) |
Minimum pension liability adjustment |
|
(89,145 |
) |
|
|
(93,639 |
) |
Unrealized gains on investments |
|
8,851 |
|
|
|
9,963 |
|
Unrealized losses on cash flow hedges |
|
(12,488 |
) |
|
|
(12,353 | ) |
|
$ |
(183,195 |
) |
|
$ |
(168,700 | ) |
The income tax (benefit) provision recorded in fiscal years 2005 and 2004 for the unrealized gains
on investments were $(631) and $285, respectively. The income tax provision (benefit) recorded in
fiscal years 2005 and 2004 for cash flow hedges were $534 and $(3,130), respectively. The income
tax provision (benefit) recorded in fiscal years 2005 and 2004 for the minimum pension liability
adjustment were $2,139 and $(4,042), respectively. Income taxes are generally not provided for translation
adjustments.
The unrealized losses on cash flow hedges included in other comprehensive (loss) income for 2005 and
2004 are net of reclassification adjustments of $11,880 and $15,025, net of tax,
respectively, for
realized net hedge losses recorded to revenues. These amounts had been included in Accumulated other
comprehensive loss in prior periods. The tax benefits associated with these reclassification adjustments
in 2005 and 2004 were $7,282 and $9,209, respectively.
12 |
|
Commitments and Contingencies |
Commitments
Rental expense for all operating leases amounted to $59,000 in 2005, $59,200 in 2004 and $53,400 in
2003. Future minimum rental commitments on noncancelable leases are as follows: 2006$42,400;
2007$34,500; 2008$24,000; 2009$15,600; 2010$10,300 and an aggregate of $15,400
thereafter.
As of September 30, 2005, the Company has certain future purchase commitments aggregating to approximately
$216,100, which will be expended over the next several years.
Contingencies
In 1986, the Company acquired a business that manufactured, among other things, latex surgical gloves.
In 1995, the Company divested this glove business. The Company, along with a number of other manufacturers,
has been named as a defendant in approximately 524 product liability lawsuits related to natural
rubber latex that have been filed in various state and Federal courts. Cases pending in Federal court
are being coordinated under the matter In re Latex Gloves Products Liability Litigation (MDL Docket No. 1148) in Philadelphia, and analogous procedures have been implemented in the state
courts of California, Pennsylvania, New Jersey and New York. Generally, these actions allege that
medical personnel have suffered allergic reactions ranging from skin irritation to anaphylaxis as
a result of exposure to medical gloves containing natural rubber latex. Since the inception of this
litigation, 463 of these cases have been closed with no liability to the Company (462 of which were
closed with prejudice), and 45 cases have been settled for an aggregate de minimis amount.
The Company, along with another manufacturer and several medical product distributors, is named as
a defendant in three product liability lawsuits relating to healthcare workers who allegedly sustained
accidental needlesticks, but have not become infected with any disease. Generally, these actions
allege that healthcare workers have sustained needlesticks using hollow-bore needle devices manufactured
by the Company and, as a result, require medical testing, counseling and/or treatment. In some cases,
these actions additionally allege that the healthcare workers have sustained mental anguish. Plaintiffs
seek money
54
Notes to Consolidated Financial Statements Becton, Dickinson and Company
damages in all of these actions. The Company had previously been named as a defendant in eight similar
suits relating to healthcare workers who allegedly sustained accidental needlesticks, each of which
has either been dismissed with prejudice or voluntarily withdrawn. Regarding the three pending suits:
|
In Ohio, Grant vs. Becton Dickinson et al. (Case No. 98CVB075616, Franklin County Court), which was filed on July 22, 1998, the trial court granted
class certification on June 6, 2005. The Company has filed an appeal of the trial courts ruling. |
|
In Oklahoma and South Carolina, cases have been filed on behalf of an unspecified number of healthcare
workers seeking class action certification under the laws of these states in state court in Oklahoma,
under the caption Palmer vs. Becton Dickinson et al. (Case No. CJ-98-685, Sequoyah County District Court), filed on October 27, 1998, and in state court
in South Carolina, under the caption Bales vs. Becton Dickinson et al. (Case No. 98-CP-40-4343, Richland County Court of Common Pleas), filed on November 25, 1998. |
The
Company continues to oppose class action certification in these cases, including
pursuing all appropriate rights of appeal.
In Illinois, the matter of McCaster vs. Becton Dickinson (Case No. 04L 012544) was settled on July 5, 2005 for an amount that is not material to the Companys
results of operations, financial condition or cash flows. This case was originally filed as a purported
class action needlestick case in the Circuit Court of Cook County and had been refiled in November
2004 as an individual personal injury case.
A purported class action suit was brought against the Company under the caption Danielle Cardozo, by her litigation guardian Darlene Cardozo v. Becton, Dickinson and Company (Civil Action No. S83059, Supreme Court, British Columbia) on November 6, 2003. The suit alleged personal
injury to persons in British Columbia who received test results generated by the BD ProbeTec ET instrument, and sought money damages. The Company has reached a settlement in this case for an
amount that is not material to the Companys results of operations, financial condition or cash
flows.
The Company has insurance policies in place, and believes that a substantial portion of potential liability,
if any, in the latex and class action matters would be covered by insurance. In order to protect
our rights to additional coverage, the Company filed an action for declaratory judgment under the
caption Becton Dickinson and Company vs. Adriatic Insurance Company et al. (Docket No. MID-L-3649-99MT, Middlesex County Superior Court) in New Jersey state court. The Company
has withdrawn this action, with the right to refile, so that settlement discussions with the insurance
companies may proceed.
On August 3, 2004, the Company was served with an administrative subpoena issued by the United States
Attorneys Office in Dallas, Texas (the U.S. Attorney) in connection with an investigation
the U.S. Attorney is conducting of transactions between another company and certain of its suppliers,
including the Company. The Company has fully responded to the subpoena. The Company believes that
its transactions with the other company have fully complied with the law and that the Company is
not currently a target of the investigation.
On August 8, 2005, the Company received a subpoena issued by the Attorney General of the State of Connecticut,
which seeks documents and information relating to the Companys participation as a member of
Healthcare Research & Development Institute, LLC. (HRDI), a healthcare trade organization
(an independent member of the Companys board of directors, Gary Mecklenburg, also serves as
the non-executive chairman of HRDI). The subpoena indicates that it was issued as part of an investigation
into possible violations of the antitrust laws. The Company believes that its participation in HRDI
complies fully with the law and has no additional information regarding the investigation at this
time. The Company is responding to the subpoena.
The Company is named as a defendant in five purported class action suits brought on behalf of direct
purchasers of the Companys products, such as distributors, alleging that the Company violated
federal antitrust laws, resulting in the charging of higher prices for the Companys products
to the plaintiff and other purported class members. The cases filed are as follows: Louisiana Wholesale Drug Company, Inc., et. al. vs. Becton Dickinson and Company (Civil Action No. 05-1602, U.S. District Court, Newark, New Jersey) filed on March 25, 2005; SAJ Distributors, Inc. et. al. vs. Becton Dickinson & Co. (Case 2:05-CV-04763-JD, United States District Court, Eastern District of Pennsylvania), filed on
September 6, 2005; Dik Drug Company, et. al. vs. Becton, Dickinson and Company (Case No. 2:05-CV-04465, U.S. District Court, Newark, New Jersey) filed on September 12, 2005; American Sales Company, Inc. et. al. vs. Becton, Dickinson & Co. (Case No. 2:05-CV-05212-CRM, U.S. District Court, Eastern District of Pennsylvania), filed on October
3, 2005; and Park Surgical Co. Inc. et. al. vs. Becton, Dickinson and Company (Case 2:05-CV-05678-CMR, United States District Court, Eastern District of Pennsylvania), filed on
October 26, 2005. The actions brought by Louisiana Wholesale Drug Company and Dik Drug Company in
New Jersey have been consolidated under the caption In re Hypodermic Products Antitrust Litigation.
On June 7, 2005, Jabos Pharmacy, Inc. filed a purported class action lawsuit against the Company
under the caption Jabos Pharmacy, Inc., et. al. v. Becton Dickinson & Company (Case No. 2:05-CV-00162, United States District Court, Greenville, Tennessee)
55
Notes to Consolidated Financial Statements Becton, Dickinson and Company
seeking monetary damages. The complaint alleges that the Company violated federal and various state antitrust laws, resulting in the charging of higher prices for the Companys products to plaintiff and other purported class members. Unlike the complaints described above, which were brought on behalf of direct purchasers of the Companys products, the Jabos Pharmacy complaint is brought on behalf of indirect purchasers of the Companys products. The plaintiffs in each of these cases seek monetary damages. The Company has made a motion before the Judicial Panel on Multidistrict Litigation to transfer all of the above actions for coordinated or consolidated pre-trial proceedings. The panel heard the Companys motion on November 17, 2005, but has not yet issued a decision.
On August 31, 2005, Daniels Sharpsmart filed suit against the Company, another manufacturer and three group purchasing organizations under the caption Daniels Sharpsmart, Inc. v. Tyco International, (US) Inc., et. al. (Civil Action No. 505CV169, United States District Court, Eastern District of Texas). The plaintiff alleges, among other things, that the Company and the other defendants conspired to exclude the plaintiff from the sharps-collection market by entering into long-term contracts in violation of federal and state antitrust laws, and seeks monetary damages.
The Company was a defendant in the matter of Dynovation Medical, Inc. et al v. Becton Dickinson and Company (Civil Action No. 505CV73, U.S. District Court, Eastern District of Texas). The plaintiffs in the suit had alleged, among other things, that the Company materially breached its license agreement with Dynovation relating to the BD Insyte Autoguard IV catheter product, and that the Companys safety blood collection sets infringed certain Dynovation patents. The suit was concluded in September 2005 resulting in the Company receiving a fully-paid up patent license from Dynovation.
On May 28, 2004, Therasense, Inc. (Therasense) filed suit against the Company in the U.S. District Court for the Northern District of California (Case Number: C 04-02123 WDB) asserting that the Companys 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 the Company against Therasense requesting a declaratory judgment that the Companys products do not infringe the Therasense patents and that the Therasense patents are invalid.
The Company believes that it has meritorious defenses to each of the above-mentioned suits pending against the Company and is engaged in a vigorous defense of each of these matters.
The Company is also involved both as a plaintiff and a defendant in other legal proceedings and claims that arise in the ordinary course of business.
The Company is a party to a number of Federal proceedings in the United States brought under the Comprehensive Environment Response, Compensation and Liability Act, also known as 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.
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 the Company is a party. In accordance with
U.S. generally accepted accounting principles, the Company establishes accruals
to the extent probable future losses are estimable (in the case of environmental
matters, without considering possible third-party recoveries). In view of
the uncertainties discussed above, the Company could incur charges in excess
of any currently established accruals and, to the extent available, excess
liability insurance. In the opinion of management, any such future charges,
individually or in the aggregate, could have a material adverse effect on
the Companys consolidated results of operations and consolidated cash
flows in the period or periods in which they are recorded or paid.
13 |
|
Share-Based Compensation |
The Company
grants share-based awards under the 2004 Plan, which provides for long-term
incentive compensation to employees and directors consisting of: stock options,
performance-based stock awards, stock appreciation rights, restricted stock
units and other stock awards. The Company believes such awards align the interest
of its employees and directors with those of its shareholders and encourage
employees and directors to act as equity owners of the Company. Prior to the
adoption of the 2004 Plan, the Company had employee and director stock option
plans, which were terminated with respect to future grants effective upon
shareholder approval of the 2004 Plan in February 2004. In 2005 and 2004,
the compensation expense for these plans charged to income was $70,199 and
$2,466, respectively, and the associated income tax benefit recognized was
$19,941 and $937, respectively. No compensation expense was charged to income
in 2003.
56
Notes to Consolidated Financial Statements Becton, Dickinson and 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. Beginning with the November 2004 (fiscal 2005) stock option grants, fair value was 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 and termination 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 based upon the most recently declared quarterly dividend as of the grant date.
The weighted average grant date fair value of stock options granted during the years 2005, 2004 and 2003 was $17.16, $13.25 and $10.20, respectively. Stock options granted in 2004 and 2003 were valued based on the grant date fair value of those awards, using the Black-Scholes option pricing model. See Note 2 for further discussion.
A summary of stock options outstanding as of September 30, 2005, and changes during the year then ended is as follows:
|
Stock
Options |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Contractual
Term (Years) |
|
Aggregate
Intrinsic
Value |
|
Balance at October 1 |
|
26,926,805 |
|
$ |
31.15 |
|
|
|
|
|
|
|
Granted |
|
1,808,715 |
|
|
54.44 |
|
|
|
|
|
|
|
Exercised |
|
(4,607,210 |
) |
|
26.83 |
|
|
|
|
|
|
|
Forfeited, canceled
or expired |
|
(400,386 |
) |
|
35.92 |
|
|
|
|
|
| |
Balance at
September 30 |
|
23,727,924 |
|
$ |
33.68 |
|
|
5.77 |
|
$ |
444,811 |
|
Vested and expected to
vest at September 30 |
|
22,898,297 |
|
$ |
33.49 |
|
|
5.70 |
|
$ |
433,730 |
|
Exercisable at
September 30 |
|
15,431,655 |
|
$ |
30.79 |
|
|
4.66 |
|
$ |
334,002 |
|
Cash received from the exercising of stock options in 2005, 2004 and 2003 was $123,613, $173,883 and $86,364, respectively. The actual tax benefit realized for tax deductions from
stock option exercises totaled $44,958, $52,131 and $29,969, respectively. The total intrinsic value of stock options exercised during the years 2005, 2004 and 2003 was $134,342, $157,293 and $91,276, respectively.
Performance-Based Restricted Stock Units
Performance-based restricted stock units cliff vest three years after the date of grant, and are tied to the Companys 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 the Companys long-term incentive program, the actual payout under these awards may vary from zero to 250% of an employees target payout, based on the Companys 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. Compensation cost initially recognized assumes that the target payout level will be achieved and is adjusted for subsequent changes in the expected outcome of performance-related conditions until the vesting date.
A summary of performance-based restricted stock units outstanding as of September 30, 2005, and changes during the year then ended is as follows:
|
Stock
Units |
|
Weighted
Average
Conversion
Price |
|
Weighted
Average
Remaining
Contractual
Term (Years) |
|
Aggregate
Intrinsic
Value |
|
Balance at October 1 |
|
367,978 |
|
$ |
38.93 |
|
|
|
|
|
|
|
Granted |
|
1,404,033 |
|
|
54.41 |
|
|
|
|
|
|
|
Converted |
|
(1,009 |
) |
|
54.41 |
|
|
|
|
|
|
|
Forfeited or canceled |
|
(20,342 |
) |
|
54.41 |
|
|
|
|
|
| |
Balance at September 30(A) |
|
1,750,660 |
|
$ |
51.16 |
|
|
1.94 |
|
$ |
91,787 |
|
Expected to vest at
at September 30(B) |
|
994,973 |
|
$ |
51.16 |
|
|
1.94 |
|
$ |
52,166 |
|
(A) |
Based on 250% of the target payout. |
|
|
(B) |
Net of expected forfeited units and units in excess of the expected performance payout of 175,066 and 580,621, respectively. |
The weighted average grant date fair value of performance-based restricted stock units granted during the years 2005 and 2004 was $54.41 and $38.93, respectively.
Time-Vested Restricted Stock Units
Time-vested restricted stock units generally cliff vest three years after the date of grant, except for certain key executives of the Company, including the executive officers, for which such units generally vest one year following the employees retirement. The related share-based compensation expense is recorded over the requisite service period, which is the vesting period or in the
57
Notes to Consolidated Financial Statements Becton, Dickinson and Company
case of certain key executives is based on an assumed average retirement age. The fair value of all time-vested restricted stock units is based on the market value of the Companys stock on the date of grant.
A summary of time-vested restricted stock units outstanding as of September 30, 2005, and changes during the year then ended is as follows:
|
Stock
Units |
|
Weighted
Average
Conversion
Price |
|
Weighted
Average
Remaining
Contractual
Term (Years) |
|
Aggregate
Intrinsic
Value |
|
Balance at October 1 |
|
77,915 |
|
$ |
38.78 |
|
|
|
|
|
|
|
Granted |
|
571,669 |
|
|
54.48 |
|
|
|
|
|
|
|
Converted |
|
(5,887 |
) |
|
54.41 |
|
|
|
|
|
|
|
Forfeited or canceled |
|
(13,640 |
) |
|
54.41 |
|
|
|
|
|
|
|
Balance at September 30 |
|
630,057 |
|
$ |
52.54 |
|
|
3.47 |
|
$ |
33,034 |
|
Expected to vest
at September 30 |
|
567,051 |
|
$ |
52.54 |
|
|
3.47 |
|
$ |
29,731 |
|
The weighted average grant date fair value of time-vested restricted stock units granted during the years 2005 and 2004 was $54.48 and $38.78, respectively.
The amount of unrecognized compensation expense for all non-vested share-based awards as of September 30, 2005 is approximately $125.4 million, which is expected to be recognized over a weighted-average remaining life of approximately 2.1 years. As of September 30, 2005, 5,931,893 shares remain available for award under the original 9,000,000 share authorization of the 2004 Plan.
The Company has a policy of satisfying share-based payments through either open market purchases or shares held in treasury. At September 30, 2005, the Company estimates that it has sufficient shares held in treasury to satisfy these payments in 2006.
Other Stock Plans
The Company has a Stock Award Plan, which allows for grants of common shares to certain key employees. Distribution of 25% or more of each award is deferred until after retirement or involuntary termination, upon which the deferred portion of the award is distributable in five equal annual installments. The balance of the award is distributable over five years from the grant date, subject to certain conditions. In February 2004, this plan was terminated with respect to future grants upon the adoption of the 2004 Plan. At September 30, 2005 and 2004, awards for 283,003 and 321,131 shares, respectively were outstanding.
The Company has a Restricted Stock Plan for Non-Employee Directors which reserves for issuance 300,000 shares of the Companys common stock. No restricted shares were issued in 2005.
The
Company has a Directors Deferral Plan, which provides a means to defer
director compensation, from time to time, on a deferred stock or cash basis.
As of September 30, 2005, 111,868 shares were held in trust, of which 13,288
shares represented Directors compensation in 2005, in accordance with
the provisions of the plan. Under this plan, which is unfunded, directors
have an unsecured contractual commitment from the Company.
The Company also has a Deferred Compensation Plan that allows certain highly-compensated employees, including executive officers, to defer salary, annual incentive awards and certain equity-based compensation. As of September 30, 2005, 183,205 shares were issuable under this plan.
For the years ended September 30, 2005, 2004 and 2003, the computations of basic and diluted earnings per share (shares in thousands) were as follows:
|
2005 |
|
|
2004 |
|
2003 |
|
Income from continuing operations |
$ |
692,283 |
|
|
$ |
582,504 |
|
$ |
554,930 |
|
Preferred stock dividends |
|
(367 |
) |
|
|
(2,115 |
) |
|
(2,344 |
) |
Income from continuing operations
available to common shareholders(A) |
|
691,916 |
|
|
|
580,389 |
|
|
552,586 |
|
Preferred stock dividendsusing
if converted method |
|
367 |
|
|
|
2,115 |
|
|
2,344 |
|
Additional ESOP contributionusing
if converted method |
|
|
|
|
|
(52 |
) |
|
(502 |
) |
Income from continuing operations
available to common shareholders
after assumed conversions(B) |
$ |
692,283 |
|
|
$ |
582,452 |
|
$ |
554,428 |
|
Average common shares outstanding(C) |
|
251,429 |
|
|
|
252,011 |
|
|
254,497 |
|
Dilutive stock equivalents from
stock plans |
|
8,671 |
|
|
|
7,948 |
|
|
5,402 |
|
Shares issuable upon conversion
of preferred stock |
|
612 |
|
|
|
3,378 |
|
|
3,736 |
|
Average common and common
equivalent shares outstanding
assuming dilution(D) |
|
260,712 |
|
|
|
263,337 |
|
|
263,635 |
|
Basic earnings per shareincome
from continuing operations |
$ |
2.75 |
|
|
$ |
2.30 |
|
$ |
2.17 |
|
(A divided by C) |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per shareincome
from continuing operations |
$ |
2.66 |
|
|
$ |
2.21 |
|
$ |
2.10 |
|
(B divided by D) |
|
|
|
|
|
|
|
|
|
|
58
Notes to Consolidated Financial Statements Becton, Dickinson and Company
The Companys organizational structure is based upon its three principal business segments: BD Medical (Medical), BD Diagnostics (Diagnostics) and BD Biosciences (Biosciences).
The
major product lines in the Medical segment include needles, syringes and intravenous
catheters, including safety-engineered devices, for medication delivery; insulin
injection devices and blood glucose monitors for the treatment of diabetes;
prefillable drug delivery devices provided to pharmaceutical companies and
sold to end-users as drug/device combinations; surgical blades and regional
anesthesia needles; critical care monitoring devices; ophthalmic surgery devices;
sharps disposal containers; and home healthcare products. The major products
and services in the Diagnostics segment are integrated systems for evacuated
blood collection; an extensive line of safety-engineered specimen collection
products and systems; plated media; automated blood culturing; molecular testing
systems for sexually transmitted diseases; microorganism identification and
drug susceptibility systems; and rapid manual testing products. The major
product lines in the Biosciences segment include fluorescence activated cell
sorters and analyzers; cell imaging systems; monoclonal antibodies and kits;
reagent systems for life sciences research; tools to aid in drug discovery
and growth of tissue and cells; and diagnostic assays.
The Company evaluates performance of its business segments based upon operating income. Segment operating income represents revenues reduced by product costs and operating expenses.
Distribution of products is primarily through distributors, as well as directly to hospitals, laboratories and other end users. Sales to a distributor which supplies the Companys products to many end users accounted for approximately 11% of revenues in 2005, 2004 and 2003, respectively and included products from the Medical and Diagnostics segments. No other customer accounted for 10% or more of revenues in each of the three years presented.
Revenues |
|
2005 |
|
|
2004 |
|
2003 |
|
Medical |
|
$ |
2,958,088 |
|
|
$ |
2,680,165 |
|
$ |
2,456,876 |
|
Diagnostics |
|
|
1,657,064 |
|
|
|
1,531,639 |
|
|
1,373,651 |
|
Biosciences |
|
|
799,529 |
|
|
|
722,941 |
|
|
632,982 |
|
Total(A) |
|
$ |
5,414,681 |
|
|
$ |
4,934,745 |
|
$ |
4,463,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
710,551 |
|
|
$ |
566,582 |
(B) |
$ |
556,284 |
|
Diagnostics |
|
|
413,908 |
|
|
|
359,370 |
|
|
302,071 |
|
Biosciences |
|
|
175,339 |
|
|
|
155,888 |
|
|
100,597 |
(C) |
Total Segment Operating Income |
|
|
1,299,798 |
|
|
|
1,081,840 |
|
|
958,952 |
|
Unallocated Expenses(D) |
|
|
(294,944 |
)(E)
|
|
|
(328,972) |
(F)
|
|
(236,994 |
) |
Income From Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
Before Income Taxes |
|
$ |
1,004,854 |
|
|
$ |
752,868 |
|
$ |
721,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
2,656,320 |
|
|
$ |
2,703,643 |
|
$ |
2,738,082 |
|
Diagnostics |
|
|
1,245,769 |
|
|
|
1,217,620 |
|
|
1,128,878 |
|
Biosciences |
|
|
678,286 |
|
|
|
706,728 |
|
|
717,455 |
(C) |
Total Segment Assets |
|
|
4,580,375 |
|
|
|
4,627,991 |
|
|
4,584,415 |
|
Corporate and All Other(G) |
|
|
1,491,594 |
|
|
|
1,060,894 |
|
|
792,535 |
|
Discontinued Operations |
|
|
|
|
|
|
63,694 |
|
|
195,303 |
|
Total |
|
$ |
6,071,969 |
|
|
$ |
5,752,579 |
|
$ |
5,572,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
184,525 |
|
|
$ |
158,728 |
|
$ |
167,168 |
|
Diagnostics |
|
|
99,742 |
|
|
|
79,782 |
|
|
61,590 |
|
Biosciences |
|
|
22,218 |
|
|
|
16,560 |
|
|
20,287 |
|
Corporate and All Other |
|
|
11,143 |
|
|
|
10,648 |
|
|
10,173 |
|
Total |
|
$ |
317,628 |
|
|
$ |
265,718 |
|
$ |
259,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
|
|
|
|
|
|
|
|
|
Medical |
|
$ |
202,825 |
|
|
$ |
187,254 |
|
$ |
174,711 |
|
Diagnostics |
|
|
102,882 |
|
|
|
97,731 |
|
|
86,882 |
|
Biosciences |
|
|
64,599 |
|
|
|
55,878 |
|
|
55,896 |
|
Corporate and All Other |
|
|
17,190 |
|
|
|
16,361 |
|
|
18,270 |
|
Total |
|
$ |
387,496 |
|
|
$ |
357,224 |
|
$ |
335,759 |
|
(A) |
Intersegment revenues are not material. |
|
|
(B) |
Includes the $45,024 charge related to blood glucose monitoring products as discussed in Note 19. |
|
|
(C) |
Includes $26,717 in 2003 of impairment charges discussed in Note 3. |
|
|
(D) |
Includes interest, net; foreign exchange; corporate expenses; and certain legal defense costs. |
|
|
(E) |
Includes share-based compensation expense, as discussed further in Note 2. |
|
|
(F) |
Includes the litigation settlement of $100,000 as discussed in Note 16. |
|
|
(G) |
Includes cash and investments and corporate assets. |
59
Notes to Consolidated Financial Statements Becton, Dickinson and Company
Revenues by Organizational Units |
|
2005 |
|
|
2004 |
|
2003 |
|
BD Medical |
|
|
|
|
|
|
|
|
|
|
|
Medical Surgical Systems |
|
$ |
|