UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

 

 

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010

 

COMMISSION FILE NUMBER 1-4802

 

 

 

 

 

 

BECTON, DICKINSON AND COMPANY

(Exact name of registrant as specified in its charter)

 

 

(201) 847-6800

(Registrant’s telephone number, including area code)

 

 

 

 

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

As of March 31, 2010, the aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant was approximately $18,325,503,422.

 

As of October 31, 2010, 229,961,230 shares of the registrant’s common stock were outstanding.

 

Documents Incorporated by Reference

 

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held February 1, 2011 are incorporated by reference into Part III hereof.

 

 

TABLE OF CONTENTS

 

 

 

 

General

 

Becton, Dickinson and Company (also known as “BD”) was incorporated under the laws of the State of New Jersey in November 1906, as successor to a New York business started in 1897. BD’s executive offices are located at 1 Becton Drive, Franklin Lakes, New Jersey 07417-1880, and its telephone number is (201) 847-6800. All references in this Form 10-K to “BD” refer to Becton, Dickinson and Company and its domestic and foreign subsidiaries, unless otherwise indicated by the context.

 

BD is a global medical technology company engaged principally in the development, manufacture and sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.

 

Business Segments

 

BD’s operations consist of three worldwide business segments: BD Medical, BD Diagnostics and BD Biosciences. Information with respect to BD’s business segments is included in Note 6 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data, and is incorporated herein by reference.

 

BD Medical

 

BD Medical produces a broad array of medical devices that are used in a wide range of healthcare settings. BD Medical’s principal product lines include needles, syringes and intravenous catheters for medication delivery (including safety-engineered and auto-disable devices); prefilled IV flush syringes; syringes and pen needles for the self-injection of insulin and other drugs used in the treatment of diabetes; prefillable drug delivery systems provided to pharmaceutical companies and sold to end-users as drug/device combinations; regional anesthesia needles and trays; and sharps disposal containers. The primary customers served by BD Medical are hospitals and clinics; physicians’ office practices; consumers and retail pharmacies; governmental and nonprofit public health agencies; pharmaceutical companies; and healthcare workers.

 

BD Diagnostics

 

BD Diagnostics provides products for the safe collection and transport of diagnostics specimens, as well as instrument systems and reagents to detect a broad range of infectious diseases, healthcare-associated infections (“HAIs”) and cancers. BD Diagnostics’ principal products include integrated systems for specimen collection; safety-engineered blood collection products and systems; automated blood culturing systems; molecular testing systems for sexually transmitted diseases and HAIs; microorganism identification and drug susceptibility systems; liquid-based cytology systems for cervical cancer screening; rapid diagnostic assays; and plated media. BD Diagnostics serves hospitals, laboratories and clinics; reference laboratories; blood banks; healthcare workers; public health agencies; physicians’ office practices; and industrial and food microbiology laboratories.

 

BD Biosciences

 

BD Biosciences produces research and clinical tools that facilitate the study of cells, and the components of cells, to gain a better understanding of normal and disease processes. That information is used to aid the discovery and development of new drugs and vaccines, and to improve the diagnosis and management of diseases. BD Biosciences’ principal product lines include fluorescence-activated cell sorters and analyzers; monoclonal antibodies and kits for performing cell analysis; reagent systems for life science research; cell imaging systems; laboratory products for tissue culture and fluid handling; diagnostic assays; and cell culture media supplements for biopharmaceutical manufacturing. The primary customers served by BD Biosciences

are research and clinical laboratories; academic and governmental institutions; pharmaceutical and biotechnology companies; hospitals; and blood banks.

 

Acquisitions

 

On November 19, 2009, BD acquired 100% of the outstanding shares of HandyLab, Inc. (“HandyLab”), a company that develops and manufactures molecular diagnostic assays and automation platforms. The purchase price was $275 million in cash. HandyLab has developed and commercialized a flexible automated platform for performing molecular diagnostics that complements BD’s molecular diagnostics offerings, specifically in the area of HAIs. Additional information regarding this transaction is contained in Note 9 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference.

 

Divestitures

 

During the fourth quarter of 2010, the Company sold the Ophthalmic Systems unit, as well as the surgical blades, critical care and extended dwell catheter product platforms of the Medical Surgical Systems unit for $270 million. Additional information regarding this transaction is contained in Note 10 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data, which is incorporated herein by reference.

 

International Operations

 

BD’s products are manufactured and sold worldwide. For reporting purposes, we organize our operations outside the United States as follows: Europe (which includes the Middle East and Africa); Japan; Asia Pacific (which includes Australia and all of Asia except Japan); Latin America (which includes Mexico and Brazil) and Canada. The principal products sold by BD outside the United States are needles and syringes; insulin syringes and pen needles; diagnostic systems; BD Vacutainer^tm brand blood collection products; BD Hypak^tm brand prefillable syringe systems; infusion therapy products; flow cytometry instruments and reagents; and disposable laboratory products. BD has manufacturing operations outside the United States in Brazil, Canada, China, France, Germany, Hungary, India, Ireland, Japan, Mexico, Pakistan, Singapore, South Korea, Spain, Sweden and the United Kingdom. Geographic information with respect to BD’s operations is included under the heading “Geographic Information” in Note 6 to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data, and is incorporated herein by reference.

 

Foreign economic conditions and exchange rate fluctuations have caused the profitability related to foreign revenues to fluctuate more than the profitability related to domestic revenues. BD believes its activities in some countries outside the United States involve greater risk than its domestic business due to the factors cited herein, as well as the economic environment, local commercial and economic policies and political uncertainties. See further discussion of this risk in Item 1A. Risk Factors.

 

Distribution

 

BD’s products are marketed in the United States and internationally through independent distribution channels and directly to end-users by BD and independent sales representatives. No customer accounted for 10% or more of revenues in fiscal year 2010. Order backlog is not material to BD’s business inasmuch as orders for BD products generally are received and filled on a current basis, except for items temporarily out of stock. BD’s worldwide sales are not generally seasonal, with the exception of certain medical devices in the BD Medical segment, and respiratory and flu diagnostic products in the BD Diagnostics segment, that relate to seasonal diseases such as influenza.

 

Raw Materials

 

BD purchases many different types of raw materials, including plastics, glass, metals, textiles, paper products, agricultural products, electronic and mechanical sub-assemblies and various biological, chemical and petrochemical products. Certain raw materials (primarily related to the BD Biosciences segment) are not available from multiple sources. In the case of certain principal raw materials that are available from multiple sources, for various reasons (including quality assurance and cost effectiveness), BD elects to purchase these

raw materials from sole suppliers. In cases where there are regulatory requirements relating to qualification of suppliers, BD may not be able to establish additional or replacement sources on a timely basis. While BD works closely with its suppliers to ensure continuity of supply, the termination, reduction or interruption in supply of these sole-sourced raw materials could impact our ability to manufacture and sell certain of our products.

 

Research and Development

 

BD conducts its research and development (“R&D”) activities at its operating units and at BD Technologies in Research Triangle Park, North Carolina. The majority of BD’s R&D activities are conducted in the United States. Outside the United States, BD conducts R&D activities at BD Diagnostic Systems in Quebec City, Canada, BD Pharmaceutical Systems in Pont de Claix, France, and BD Medical Surgical Systems in Tuas, Singapore. BD also collaborates with certain universities, medical centers and other entities on R&D programs, and retains individual consultants to support its efforts in specialized fields. BD spent approximately $431 million, $405 million and $383 million on research and development during the fiscal years ended September 30, 2010, 2009 and 2008, respectively.

 

Intellectual Property and Licenses

 

BD owns significant intellectual property, including patents, patent applications, technology, trade secrets, know-how, copyrights and trademarks in the United States and other countries. BD is also licensed under domestic and foreign patents, patent applications, technology, trade secrets, know-how, copyrights and trademarks owned by others. In the aggregate, these intellectual property assets and licenses are of material importance to BD’s business. BD believes, however, that no single patent, technology, trademark, intellectual property asset or license is material in relation to BD’s business as a whole, or to any business segment.

 

Competition

 

BD operates in the increasingly complex and challenging medical technology marketplace whose dynamics are changing. Technological advances and scientific discoveries have accelerated the pace of change in medical technology, the regulatory environment of medical products is becoming more complex and vigorous, and economic conditions have resulted in a challenging market. Companies of varying sizes compete in the global medical technology field. Some are more specialized than BD with respect to particular markets, and some have greater financial resources than BD. New companies have entered the field, particularly in the areas of molecular diagnostics, safety-engineered devices and in the life sciences, and established companies have diversified their business activities into the medical technology area. Other firms engaged in the distribution of medical technology products have become manufacturers of medical devices and instruments as well. Acquisitions and collaborations by and among companies seeking a competitive advantage also affect the competitive environment. In addition, the entry into the market of manufacturers located in China and other low-cost manufacturing locations are creating increased pricing pressures, particularly in developing markets. Some competitors have also established manufacturing sites or have contracted with suppliers located in these countries as a means to lower their costs. New entrants may also appear, particularly from these low-cost countries.

 

BD competes in this evolving marketplace on the basis of many factors, including price, quality, innovation, service, reputation, distribution and promotion. The impact of these factors on BD’s competitive position varies among BD’s various product offerings. In order to remain competitive in the industries in which it operates, BD continues to make investments in research and development, quality management, quality improvement, product innovation and productivity improvement in support of its core strategy — to increase revenue growth by focusing on products that deliver greater benefits to patients, healthcare workers and researchers.

Third-Party Reimbursement

 

Healthcare providers and/or facilities are generally reimbursed for their services through numerous payment systems maintained by governmental agencies (e.g., Medicare and Medicaid in the United States, the National Health Service in the United Kingdom, the Joint Federal Committee in Germany, the Commission d’Evaluation des Produits et prestations in France, and the Ministry for Health, Labor and Welfare in Japan), private insurance companies, and managed care organizations. The manner and level of reimbursement in any given case may depend on the site of care, the procedure(s) performed, the final patient diagnosis, the device(s) and/or drug(s) utilized, the available budget, or a combination of these factors, and coverage and payment levels are determined at the payer’s discretion. The coverage policies and reimbursement levels of these third-party payers may impact the decisions of healthcare providers and facilities regarding which medical products they purchase and the prices they are willing to pay for those products. Thus, changes in reimbursement level or method may either positively or negatively impact sales of BD products.

 

While BD is actively engaged in promoting the value of its products for payers and patients, and it employs various efforts and resources to positively impact coverage, coding and payment processes in this regard, it has no direct control over payer decision-making with respect to coverage and payment levels for BD products. Additionally, we expect many payers to continue to explore cost-containment strategies (e.g., comparative effectiveness analyses, so-called “pay-for-performance” programs implemented by various public and private payers, and expansion of payment bundling schemes such as Accountable Care Organizations or ACOs) that could potentially impact coverage and/or payment levels for current or future BD products.

 

As BD’s product offerings are diverse across many healthcare settings, they are affected to varying degrees by the many payment systems. Therefore, individual countries, product lines or product classes may be impacted by changes to these systems. Notably, the recently-enacted healthcare reform legislation in the United States (i.e., the Patient Protection and Affordable Care Act (“PPACA”)) provides for numerous, substantive changes to U.S. healthcare payment systems, most of which are yet to be established in regulations. As yet, it is unclear whether, or how, the implementation of regulations pursuant to the PPACA might affect payment for BD products. See Item 1A. Risk Factors for a further discussion.

 

Regulation

 

BD’s medical technology products and operations are subject to regulation by the U.S. Food and Drug Administration (“FDA”) and various other federal and state agencies, as well as by foreign governmental agencies. These agencies enforce laws and regulations that govern the development, testing, manufacturing, labeling, advertising, marketing and distribution, and market surveillance of BD’s medical products. The scope of the activities of these agencies, particularly in the Europe, Japan and Asia Pacific regions in which BD operates, has been increasing.

 

BD actively maintains FDA/ISO Quality Systems that establish standards for its product design, manufacturing, and distribution processes. Prior to marketing or selling most of its products, BD must secure approval from the FDA and counterpart non-U.S. regulatory agencies. Following the introduction of a product, these agencies engage in periodic reviews of BD’s quality systems, as well as product performance, and advertising and promotional materials. These regulatory controls, as well as any changes in FDA policies, can affect the time and cost associated with the development, introduction and continued availability of new products. Where possible, BD anticipates these factors in its product development and planning processes.

 

These agencies possess the authority to take various administrative and legal actions against BD, such as product recalls, product seizures and other civil and criminal sanctions. BD also undertakes voluntary compliance actions such as voluntary recalls.

 

BD also is subject to various federal and state laws, and laws outside the United States, concerning healthcare fraud and abuse (including false claims laws and anti-kickback laws), global anti-corruption, transportation, safety and health, and customs and exports. Many of the agencies enforcing these laws have increased their enforcement activities with respect to medical device manufacturers in recent years. This

appears to be part of a general trend toward increased regulation and enforcement activity within and outside the United States.

 

BD believes it is in compliance in all material respects with applicable law and the regulations promulgated by the applicable agencies (including, without limitation, environmental laws and regulations), and that such compliance has not had, and will not have, a material adverse effect on our operations or results. See Item 3. Legal Proceedings.

 

Employees

 

As of September 30, 2010, BD had 28,803 employees, of whom 12,262 were employed in the U.S. (including Puerto Rico). BD believes that its employee relations are satisfactory.

 

Other Matters

 

Becton Dickinson France, S.A. (“BD-France”), a subsidiary of BD, was listed among approximately 2,200 other companies in an October 27, 2005 report of the Independent Inquiry Committee (“IIC”) of the United Nations (“UN”) as having been involved in humanitarian contracts in which unauthorized payments were suspected of having been made to the Iraqi Government in connection with the UN’s Oil-for-Food Programme (the “Programme”). In connection with the IIC’s report, Becton Dickinson AG, a Swiss subsidiary of BD, received a letter of inquiry from the Vendor Review Committee (“VRC”) of the United Nations Procurement Service dated November 22, 2005. The letter of inquiry said that the VRC is reviewing Becton Dickinson AG’s registration status in light of BD-France being listed in the IIC’s report and asked us for any information we might be able to provide relating to the findings of the report. BD conducted an internal review and found no evidence that BD or any BD employee made, authorized, or approved improper payments to the Iraqi Government in connection with the Programme. The representative utilized by BD in Iraq also unequivocally denied having made any such payments, and BD was unable to find any evidence of such payments being made by this representative. BD reported the results of its internal review to the VRC. In May 2008, BD received a letter from the U.N. stating that Becton Dickinson AG had been suspended from the UN Secretariat Procurement Division’s vendor roster for a minimum period of six months. We have requested that Becton Dickinson AG be reinstated. BD believes that the suspension has not had, and will not have, a material adverse effect on BD.

 

In May 2007, the French Judicial Police conducted searches of BD-France’s offices in France with respect to the matters that were the subject of the 2005 IIC report. We were informed that BD-France is one of a number of companies named in the IIC report that is being investigated by the French Judicial Police. In June 2009, the Belgian Federal Police contacted BD to interview certain individuals and review documents related to sales made under the Programme. We are cooperating fully with these investigations.

 

Available Information

 

BD maintains a website at www.bd.com. BD also makes available its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and its Current Reports on Form 8-K (and amendments to those reports) as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). These filings may be obtained and printed free of charge at www.bd.com/investors. In addition, the written charters of the Audit Committee, the Compensation and Benefits Committee, the Corporate and Scientific Affairs Committee, the Corporate Governance and Nominating Committee, and the Executive Committee of the Board of Directors, the Company’s Corporate Governance Principles and its Business Conduct and Compliance Guide, are available at BD’s website at www.bd.com/investors/corporate_governance/. Printed copies of these materials, BD’s 2010 Annual Report on Form 10-K, and BD’s reports and statements filed with, or furnished to, the SEC, may be obtained, without charge, by contacting the Corporate Secretary, BD, 1 Becton Drive, Franklin Lakes, New Jersey 07417-1880, telephone 201-847-6800.

 

BD also routinely posts important information for investors on its website at www.bd.com/investors. BD may use this website as a means of disclosing material, non-public information and for complying with its

disclosure obligations under Regulation FD adopted by the SEC. Accordingly, investors should monitor the Investor Relations portion of BD’s website noted above, in addition to following BD’s press releases, SEC filings, and public conference calls and webcasts. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this Annual Report.

 

Forward-Looking Statements

 

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 filings with the SEC and in our reports to shareholders. Additional information regarding our forward-looking statements is contained Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

An investment in BD involves a variety of risks and uncertainties. The following describes some of the significant risks that could adversely affect BD’s business, financial condition, operating results or cash flows.

 

Current economic conditions could adversely affect our operations.

 

The current economic conditions may result in a decrease in the demand for our products and services, longer sales cycles, slower adoption of new technologies and increased price competition. During fiscal year 2010, lower laboratory testing volumes and physician visits in the United States and macroeconomic factors in Western Europe contributed to weakened demand for our products. Any austerity plans implemented in Europe or other regions where governments are the primary payers of healthcare expenses and research may also result in a decrease in demand for our products. In addition, while the current economic conditions have not impaired our ability to access credit markets to date, there can be no assurance that these conditions will not adversely affect our ability to do so in the future. The current economic conditions may adversely affect our suppliers, and there can be no assurances that BD will not experience any interruptions in supply in the future. The increase in sovereign debt during the financial crisis as a result of governmental intervention in the world economy poses additional risks to the global financial system and economic recovery. We have experienced delays in collecting receivables in Greece due to the Greek government’s liquidity problems. We may experience similar delays in other jurisdictions experiencing liquidity problems. The strength and timing of any economic recovery remains uncertain, and there can be no assurance that the economic downturn will not continue to affect our operations in the future.

 

We are subject to foreign currency exchange risk.

 

Over half of our fiscal year 2010 revenues were derived from international operations. Our revenues outside the United States may be adversely affected by fluctuations in foreign currency exchange rates. A discussion of the financial impact of exchange rate fluctuations and the ways and extent to which we may attempt to address any impact is contained in Item. 7, Management’s Discussion of Financial Condition and Results of Operations. Any hedging activities in which we may engage only offset a portion of the adverse financial impact resulting from unfavorable changes in foreign currency exchange rates. We cannot predict with any certainty changes in foreign currency exchange rates or the degree to which we can address these risks.

 

Federal healthcare reform may adversely affect our results of operations.

 

The Patient Protection and Affordable Care Act (the “PPACA”) was enacted in March 2010. Under the PPACA, beginning in 2013, medical device manufacturers, such as BD, will pay a 2.3% excise tax on U.S. sales of certain medical devices. Sales of BD products that we estimate to be subject to this tax represented about 80% of BD’s total U.S. revenues in fiscal year 2010. We cannot predict with any certainty what other impact the PPACA may have on our business. The PPACA reduces Medicare and Medicaid payments to hospitals, clinical laboratories and pharmaceutical companies, and could otherwise reduce the volume of medical procedures. These factors, in turn, could result in reduced demand for our products and increased downward pricing pressure. It is also possible that the PPACA will result in lower reimbursements

for our products. While the PPACA is intended to expand health insurance coverage to uninsured persons in the United States, the impact of any overall increase in access to healthcare on sales of BD’s products is uncertain at this time.

 

Changes in reimbursement practices of third-party payers could affect the demand for our products and the prices at which they are sold.

 

Our sales depend, in part, on the extent to which healthcare providers and facilities are reimbursed by government authorities, private insurers and other third-party payers for the costs of our products. The coverage policies and reimbursement levels of third-party payers, which can vary among public and private sources, may affect which products customers purchase and the prices they are willing to pay for these products in a particular jurisdiction. Legislative or administrative reforms to reimbursement systems in the United States (as part of the PPACA) or abroad (for example, those under consideration in France, Germany, Italy and the United Kingdom) could significantly reduce reimbursement for procedures using BD products, or result in denial of reimbursement for those products. See “Third-Party Reimbursement” under Item 1. Business.

 

Price volatility could adversely affect costs associated with our operations.

 

Our results of operations could be negatively impacted by price volatility in the cost of raw materials, components, freight and energy. In particular, BD purchases supplies of resins, which are oil-based components used in the manufacture of certain products. Any significant increases in resin purchase costs could impact future operating results. Increases in the price of oil can also increase BD’s costs for packaging and transportation. New laws or regulations adopted in response to climate change could also increase energy costs and the costs of certain raw materials and components. These cost increases may adversely affect our profitability.

 

BD’s future growth is dependent upon the development of new products, and there can be no assurance that such products will be developed.

 

A significant element of our strategy is to increase revenue growth by focusing on products that deliver greater benefits to patients, healthcare workers and researchers. The development of these products requires significant research and development, clinical trials and regulatory approvals. The results of our product development efforts may be affected by a number of factors, including BD’s ability to innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement in the United States and abroad, or gain and maintain market approval of our products. In addition, patents attained by others can preclude or delay our commercialization of a product. There can be no assurance that any products now in development or that we may seek to develop in the future will achieve technological feasibility, obtain regulatory approval, or gain market acceptance.

 

The medical technology industry is very competitive.

 

The medical technology industry is subject to rapid technological changes, and we face significant competition across our product lines and in each market in which our products are sold. We face this competition from a wide range of companies. These include large medical device companies, some of which may have greater financial and marketing resources than we do. We also face competition from firms that are more specialized than we are with respect to particular markets. Other firms engaged in the distribution of medical technology products have become manufacturers of medical devices and instruments as well. In some instances, competitors, including pharmaceutical companies, also offer, or are attempting to develop, alternative therapies for disease states that may be delivered without a medical device. The development of new or improved products, processes or technologies by other companies (such as needle-free injection technology) may render our products or proposed products obsolete or less competitive. In addition, increasing customer demand for more environmentally-friendly products is creating another basis on which BD must compete. The entry into the market of manufacturers located in China and other low-cost manufacturing locations is also creating increased pricing pressures, particularly in developing markets. Some competitors have also

established manufacturing sites or have contracted with suppliers located in these countries as a means to lower their costs. New entrants may also appear, particularly from these low-cost countries.

 

A reduction or interruption in the supply of certain raw materials and components would adversely affect BD’s manufacturing operations and related product sales.

 

BD purchases many different types of raw materials and components. Certain raw materials (primarily related to the BD Biosciences segment) and components are not available from multiple sources. In addition, for quality assurance, cost-effectiveness and other reasons, BD elects to purchase certain raw materials and components from sole suppliers. The supply of these materials can be disrupted for a number of reasons, including current economic conditions as described above. While we work with suppliers to ensure continuity of supply, no assurance can be given that these efforts will be successful. In addition, where there are regulatory requirements relating to the qualification of suppliers, we may not be able to establish additional or replacement sources on a timely basis. The termination, reduction or interruption in supply of these sole-sourced raw materials and components could impact our ability to manufacture and sell certain of our products.

 

Interruption of our manufacturing operations could adversely affect BD’s future revenues and operating income.

 

We have manufacturing sites all over the world. In addition, in some instances, the manufacturing of certain of our product lines is concentrated in one or more of our plants. As a result, weather, natural disasters (including pandemics), terrorism, political change, failure to follow specific internal protocols and procedures, equipment malfunction, environmental factors or damage to one or more of our facilities could adversely affect our ability to manufacture our products.

 

BD is subject to a number of pending lawsuits.

 

BD is a defendant in a number of pending lawsuits, including purported class action lawsuits for alleged antitrust violations and product liability, and could be subject to additional lawsuits in the future. A more detailed description of these lawsuits is contained in Item 3. Legal Proceedings. 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. Any such future charges, individually or in the aggregate, could adversely affect BD’s results of operations and cash flows.

 

Consolidation in the healthcare industry could adversely affect BD’s future revenues and operating income.

 

The medical technology industry has experienced a significant amount of consolidation. As a result of this consolidation, competition to provide goods and services to customers has increased. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has placed pricing pressure on medical device suppliers. Further consolidation in the industry could exert additional pressure on the prices of our products.

 

Product defects could adversely affect the results of our operations.

 

The design, manufacture and marketing of medical devices involve certain inherent risks. Manufacturing or design defects, unanticipated use of our products, or inadequate disclosure of risks relating to the use of our products can lead to injury or other adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. A recall could result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products. Personal injuries relating to the use of our products can also result in product liability claims

being brought against us. In some circumstances, such adverse events could also cause delays in new product approvals.

 

We may experience difficulties implementing our enterprise resource planning system.

 

We are engaged in a project to upgrade our enterprise resource planning (“ERP”) system. Our ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our financial statements. The design and implementation of the new ERP system has required, and will continue to require, the investment of significant financial and human resources. The total cost needed to implement the new ERP system may turn out to be more than we currently anticipate. In addition, we may not be able to successfully implement the new ERP system without experiencing difficulties. Any disruptions, delays or deficiencies in the design and implementation of the new ERP system could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business.

 

BD is subject to extensive regulation.

 

BD is subject to extensive regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act, by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Most of BD’s products must receive clearance or approval from the FDA or non-U.S. counterpart regulatory agencies before they can be marketed or sold. The process for obtaining marketing approval or clearance may take a significant period of time and require the expenditure of substantial resources, and these may be increasing. The process may also require changes to our products or result in limitations on the indicated uses of the products. Also, governmental agencies may impose new requirements regarding registration, labeling or prohibited materials that may require us to modify or re-register products already on the market or otherwise impact our ability to market our products. In addition, once clearance or approval has been obtained for a product, there is an obligation to ensure that all applicable FDA and other regulatory requirements continue to be met.

 

Following the introduction of a product, these agencies also periodically review our manufacturing processes and product performance. Our failure to comply with the applicable good manufacturing practices, adverse event reporting, clinical trial and other requirements of these agencies could delay or prevent the production, marketing or sale of our products and result in fines, delays or suspensions of regulatory clearances, closure of manufacturing sites, seizures or recalls of products and damage to our reputation. Recent changes in enforcement practice by the FDA and other agencies have resulted in increased enforcement activity, which increases the compliance risk for BD and other companies in our industry.

 

We cannot guarantee that any of BD’s strategic acquisitions, investments or alliances will be successful.

 

While our strategy to increase revenue growth is driven primarily by internal product development, we seek to supplement our growth through strategic acquisitions, investments and alliances. Such transactions are inherently risky. The success of any acquisition, investment or alliance may be affected by a number of factors, including our ability to properly assess and value the potential business opportunity or to successfully integrate it into our existing business. There can be no assurance that any past or future transaction will be successful.

 

The international operations of BD’s business may subject BD to certain business risks.

 

BD operations outside the United States subject BD to certain risks, including the effects of fluctuations in foreign currency exchange (as discussed above); the spread of a global economic downturn; changes in foreign regulatory requirements; local product preferences; difficulty in establishing, staffing and managing foreign operations; differing labor regulations; changes in tax laws; potential political instability; trade barriers; weakening of the protection of intellectual property rights in some countries; and restrictions on the transfer of capital across borders. The success of our operations outside the United States will depend, in part, on our

ability to acquire or form and maintain alliances with local companies and make necessary infrastructure enhancements to, among other things, our production facilities and distribution networks.

 

Reductions in customers’ research budgets or government funding may adversely affect our BD Biosciences segment.

 

Our BD Biosciences segment sells products to researchers at pharmaceutical and biotechnology companies, academic institutions, government laboratories and private foundations. Research and development spending of our customers can fluctuate based on spending priorities and general economic conditions. A number of these customers are also dependent for their funding upon grants from U.S. government agencies, such as the U.S. National Institutes of Health (“NIH”) and agencies in other countries. The level of government funding of research and development is unpredictable. There have been instances where NIH grants have been frozen or otherwise unavailable for extended periods. The availability of governmental research funding may also continue to be adversely affected by the current economic downturn. Any reduction or delay in governmental funding could cause our customers to delay or forego purchases of our products.

 

Our operations are dependent in part on patents and other intellectual property assets.

 

Many of BD’s businesses rely on patent, trademark and other intellectual property assets. While we do not believe that the loss of any one patent or other intellectual property asset would materially adversely affect BD operations, these intellectual property assets, in the aggregate, are of material importance to our business. BD can lose the protection afforded by these intellectual property assets through patent expirations, legal challenges or governmental action. Patents attained by competitors, particularly as patents on our products expire, may also adversely affect our competitive position. The loss of a significant portion of our portfolio of intellectual property assets may have an adverse effect on our earnings, financial condition or cash flows. In addition, competitors may claim that BD products infringe upon their intellectual property. Resolving any intellectual property claim can be costly and time-consuming.

 

Natural disasters, war and other events could adversely affect BD’s future revenues and operating income.

 

Natural disasters (including pandemics), war, terrorism, labor disruptions and international conflicts, and actions taken by the United States and other governments in response to such events, could cause significant economic disruption and political and social instability in the United States and in areas outside of the United States in which we operate. These events could result in decreased demand for our products, adversely affect our manufacturing and distribution capabilities, or increase the costs for or cause interruptions in the supply of materials from our suppliers.

 

We need to attract and retain key employees to be competitive.

 

Our ability to compete effectively depends upon our ability to attract and retain executives and other key employees, including people in technical, marketing, sales and research positions. Competition for experienced employees, particularly for persons with specialized skills, can be intense. BD’s ability to recruit such talent will depend on a number of factors, including compensation and benefits, work location and work environment. If we cannot effectively recruit and retain qualified executives and employees, our business could be adversely affected.

 

 

None.

 

 

BD’s executive offices are located in Franklin Lakes, New Jersey. As of November 1, 2010, BD owned and leased 184 facilities throughout the world comprising approximately 16,348,578 square feet of manufacturing, warehousing, administrative and research facilities. The U.S. facilities, including Puerto Rico, comprise approximately 7,018,934 square feet of owned and 1,738,084 square feet of leased space. The international facilities comprise approximately 6,287,633 square feet of owned and 1,303,927 square feet of leased space. Sales offices and distribution centers included in the total square footage are also located throughout the world.

 

Operations in each of BD’s business segments are conducted at both U.S. and international locations. Particularly in the international marketplace, facilities often serve more than one business segment and are used for multiple purposes, such as administrative/sales, manufacturing and/or warehousing/distribution. BD generally seeks to own its manufacturing facilities, although some are leased. The following table summarizes property information by business segment.

 

 

 

 

BD believes that its facilities are of good construction and in good physical condition, are suitable and adequate for the operations conducted at those facilities, and are, with minor exceptions, fully utilized and operating at normal capacity.

 

The U.S. facilities are located in Arizona, California, Connecticut, Florida, Georgia, Illinois, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Washington, DC, Washington, Wisconsin and Puerto Rico.

 

The international facilities are grouped as follows:

 

— Europe, which includes facilities in Austria, Belgium, Denmark, England, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Kenya, Norway, Poland, Russia, Saudi Arabia, South Africa, Spain, Sweden, Switzerland, Turkey and the United Arab Emirates.

 

— Japan.

 

— Asia Pacific, which includes facilities in Australia, China, India, Indonesia, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

 

— Latin America, which includes facilities in Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Venezuela.

 

— Canada.

 

 

BD is named as a defendant in the following purported class action suits brought on behalf of distributors and other entities that purchase BD products (the “Distributor Plaintiffs”), alleging that BD violated federal antitrust laws, resulting in the charging of higher prices for BD’s products to the plaintiffs and other purported class members.

 

These actions have been consolidated under the caption “In re Hypodermic Products Antitrust Litigation.”

 

BD is also named as a defendant in the following purported class action suits brought on behalf of purchasers of BD’s products, such as hospitals (the “Hospital Plaintiffs”), alleging that BD violated federal and state antitrust laws, resulting in the charging of higher prices for BD’s products to the plaintiff and other purported class members.

 

 

The plaintiffs in each of the above antitrust class action lawsuits seek monetary damages. All of the antitrust class action lawsuits have been consolidated for pre-trial purposes in a Multi-District Litigation (MDL) in Federal court in New Jersey.

 

On April 27, 2009, BD entered into a settlement agreement with the Distributor Plaintiffs in these actions. The settlement agreement provided for, among other things, the payment by BD of $45 million in exchange for a release by all potential class members of the direct purchaser claims under federal antitrust laws related to the products and acts enumerated in the complaint, and a dismissal of the case with prejudice, insofar as it relates to direct purchaser claims. The release would not cover potential class members that affirmatively opt out of the settlement. On September 30, 2010, the court issued an order denying a motion to approve the settlement agreement, ruling that the Hospital Plaintiffs, and not the Distributor Plaintiffs, are the direct purchasers entitled to pursue damages under the federal antitrust laws for certain sales of BD products. The settlement agreement currently remains in effect, subject to certain termination provisions, and the Distributor Plaintiffs are seeking appellate review of the court’s order.

 

In June 2007, Retractable Technologies, Inc. (“RTI”) filed a complaint against BD under the caption Retractable Technologies, Inc. vs. Becton Dickinson and Company (Civil Action No. 2:07-cv-250, U.S. District Court, Eastern District of Texas). RTI alleges that the BD Integra^tm syringes infringe patents licensed exclusively to RTI. In its complaint, RTI also alleges that BD engaged in false advertising with respect to certain of BD’s safety-engineered products in violation of the Lanham Act; acted to exclude RTI from various product markets and to maintain its market share through, among other things, exclusionary contracts in violation of state and federal antitrust laws; and engaged in unfair competition. In January 2008, the court severed the patent and non-patent claims into separate cases. RTI seeks money damages and injunctive relief. On April 1, 2008, RTI filed a complaint against BD under the caption Retractable Technologies, Inc. and Thomas J. Shaw v. Becton Dickinson and Company (Civil Action No. 2:08-cv-141, U.S. District Court, Eastern District of Texas). RTI alleges that the BD Integra^tm syringes infringe another patent licensed exclusively to RTI. RTI seeks money damages and injunctive relief. On August 29, 2008, the court ordered the consolidation of the patent cases. On November 9, 2009, at a trial of these consolidated cases, the jury rendered a verdict in favor of RTI on all but one of its infringement claims, but did not find any willful infringement, and awarded RTI $5 million in damages. On May 19, 2010, the court granted RTI’s motion for a permanent injunction against the continued sale by BD of its BD Integra^tm products in their current form, but stayed the injunction for the longer of twelve months or the duration of any appeal. At the same time, the court lifted a stay of RTI’s non-patent claims that the court had imposed during the pendency of the patent claims at the trial court level. On June 16, 2010, BD filed its appeal with the Court of Appeals for the Federal Circuit.

On October 19, 2009, Gen-Probe Incorporated (“Gen-Probe”) filed a patent infringement action against BD in the U.S. District Court for the Southern District of California. The complaint alleges that the BD Viper^tm and BD Viper^tm XTR^tm systems, and BD ProbeTec^tm specimen collection products infringe certain U.S. patents of Gen-Probe. On March 23, 2010, Gen-Probe filed a complaint, also in the U.S. District Court for the Southern District of California, alleging that the BD Max^tm instrument infringes Gen-Probe patents. Additional disclosures regarding this instrument are provided in Note 9 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data. The patents alleged to be infringed are a subset of the Gen-Probe patents asserted against BD in the October 2009 suit. On June 8, 2010, the Court consolidated these cases. Gen-Probe is seeking monetary damages and injunctive relief.

 

BD believes that it has meritorious defenses to each of the above-mentioned suits pending against BD and is engaged in a vigorous defense of each of these matters.

 

BD is also involved both as a plaintiff and a defendant in other legal proceedings and claims that arise in the ordinary course of business.

 

BD 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. The affected sites are in varying stages of development. In some instances, the remedy has been completed, while in others, environmental studies are commencing. 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, BD is not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which BD is a party. In accordance with U.S. generally accepted accounting principles, BD establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). In view of the uncertainties discussed below, BD could incur charges in excess of any currently established accruals and, to the extent available, excess liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on BD’s consolidated results of operations and consolidated cash flows.

 

Executive Officers of the Registrant

 

The following is a list of the executive officers of BD, their ages and all positions and offices held by each of them during the past five years. There is no family relationship between any executive officer or director of BD.

 

 

 

BD’s common stock is listed on the New York Stock Exchange. As of October 31, 2010, there were approximately 8,895 shareholders of record.

 

Market and Market Prices of Common Stock (per common share)

 

 

Dividends (per common share)

 

 

Issuer Purchases of Equity Securities

 

The table below sets forth certain information regarding BD’s purchases of its common stock during the fiscal quarter ended September 30, 2010.

 

 

 

 

 

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

 

Becton, Dickinson and Company

 

 

 

 

 

FINANCIAL REVIEW

 

Company Overview

 

Description of the Company and Business Segments

 

Becton, Dickinson and Company (“BD”) is a global medical technology company engaged principally in the development, manufacture and sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. Our business consists of three worldwide business segments — BD Medical (“Medical”), BD Diagnostics (“Diagnostics”) and BD Biosciences (“Biosciences”). Our products are marketed in the United States and internationally through independent distribution channels and directly to end-users by BD and independent sales representatives. References to years throughout this discussion relate to our fiscal years, which end on September 30.

 

Strategic Objectives

 

BD remains focused on delivering sustainable growth and shareholder value, while making appropriate investments for the future. BD management operates the business consistent with the following core strategies:

 

 

Our efforts to increase revenues and earnings per share are focused on four specific areas within healthcare and life sciences:

 

 

We continue to strive to improve the efficiency of our capital structure and follow these guiding principles:

 

 

In assessing the outcomes of these strategies as well as BD’s financial condition and operating performance, management generally reviews quarterly forecast data, monthly actual results, segment sales and other similar information. We also consider trends related to certain key financial data, including gross profit margin, selling and administrative expense, investment in research and development, return on invested capital, and cash flows.

Financial Results

 

Worldwide revenues in 2010 of $7.4 billion increased 5.5% from the prior year and reflected volume increases of approximately 6%, unfavorable foreign exchange translation of 0.1%, inclusive of hedge losses, and price decreases of 0.4%. The increase is attributable to solid revenue growth in the Medical Segment, continued improvement in Biosciences sales and, to a lesser extent, growth in Diagnostics segment revenues. U.S. revenues increased 5% to $3.3 billion. Sales in the United States of safety-engineered devices grew 5% to $1.11 billion in 2010 from $1.06 billion in 2009. International revenues of $4.1 billion grew 6% compared with the prior year. International sales of safety-engineered devices grew 9.5% to $622 million in 2010 from $568 million in 2009, which included an estimated 1.4% of favorable foreign currency translation, net of hedge losses.

 

Operating income in 2010 grew 5.5% to $1.7 billion or 22.7% of revenues, as compared with $1.6 billion, or 22.8% of revenues in 2009. Operating income growth reflected an overall unfavorable impact of foreign exchange translation, net of hedge losses, as well as the absence of a $45 million litigation charge recorded in 2009. The net unfavorable impact of these items on operating income growth in 2010 was 330 basis points.

 

Our financial position remains strong, with cash flows from operating activities totaling $1.7 billion in 2010. At September 30, 2010, we had $1.2 billion in cash and equivalents and our debt-to-capitalization at September 30, 2010 was 23.7% compared with 26.8% at the end of 2009. In 2010, BD’s cash outflows relating to acquisitions included the purchase of HandyLab, Inc., a company that develops and manufactures molecular diagnostic assays and automation platforms, for $275 million in cash. Capital expenditures were $537 million in 2010 as we continue to invest in capacity across our segments to support future growth. BD’s strong cash flow generation also provided the flexibility to continue to return value to our shareholders in the form of share repurchases and dividends. During 2010, we repurchased 10.1 million shares of common stock for $750 million and paid cash dividends to our shareholders totaling $346 million. In November 2010, we issued $700 million of 10-year 3.25% Notes and $300 million of 30-year 5.00% Notes, as discussed further below.

 

Our anticipated revenue growth over the next three years is expected to come from business growth and expansion among all segments and regions of the world, and the development in each business segment of new products and services that provide increased benefits to patients, healthcare workers and researchers. 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, economic conditions in the United States and elsewhere, increased competition and healthcare reform initiatives. For example, the recently-enacted U.S. healthcare reform legislation contains certain tax provisions that will affect BD. The most significant impact is the medical device excise tax, which imposes a 2.3% tax on certain U.S. sales of medical devices, beginning in January 2013. Sales of BD products that we estimate to be subject to this tax represented about 80% of BD’s total U.S. revenues in fiscal year 2010. In addition, the new law included a tax provision that eliminated the employer deduction of the Medicare Part D retiree drug subsidy, and, as a result, we recorded a charge of $9 million, or 4 cents per share, in the second quarter of 2010.

 

We face currency exposure each reporting period that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that fluctuate from the beginning of such period. From time to time, we purchase forward contracts and options 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. We do not enter into derivative instruments for trading or speculative purposes. During 2010, the U.S. dollar weakened against most foreign currencies compared with rates during 2009. The resulting favorable impact on worldwide revenues was offset by losses from our hedging activities. For further discussion refer to Note 12 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data.

Divestiture

 

During the fourth quarter of 2010, the Company sold the Ophthalmic Systems unit, as well as the surgical blades, critical care and extended dwell catheter product platforms of the Medical Surgical Systems unit. Following the sale, prior period Consolidated Statements of Income and Cash Flows were restated to present separately the operating results of the Ophthalmic Systems unit, surgical blade and critical care product platforms as discontinued operations. See Note 10 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data for additional discussion. The results of operations associated with the extended dwell catheter product platform are reported within continuing operations, as the divestiture of this asset group did not meet the criteria for discontinued operations.

 

Results of Continuing Operations

 

Comparisons of income from continuing operations between 2010 and 2009 are affected by the following significant items that are reflected in our 2010 financial results:

 

 

Medical Segment

 

Medical revenues in 2010 of $3.8 billion increased $239 million, or 6.7%, over 2009, which reflected an estimated impact of favorable foreign currency translation of 0.5%, net of hedge losses.

 

The following is a summary of Medical revenues by organizational unit:

 

 

 

 

Revenue growth in the Medical Surgical Systems unit continues to be driven by sales of safety-engineered products and prefilled flush syringes. Revenues of safety-engineered products increased 5% in the United States and 15% internationally, which included an estimated favorable foreign exchange impact of 3%, net of hedge losses. Revenue growth in the Diabetes Care unit resulted primarily from continued strong growth in worldwide pen needle sales and a co-marketing agreement in the United States. Revenue growth in the Pharmaceutical Systems unit was driven by double-digit growth in the United States, Japan and Asia Pacific. Revenues related to the H1N1 pandemic grew $15 million to $45 million for the Medical Surgical Systems unit and grew $10 million to $35 million for the Pharmaceutical Systems unit in 2010.

 

Medical operating income in 2010 was $1.1 billion, or 29.5% of Medical revenues, as compared with $1.0 billion, or 29.5%, of revenues in 2009. Favorable manufacturing productivity improvements were substantially offset by a slight decrease in gross profit margin resulting from unfavorable foreign currency

translation, a modest increase in the cost of raw materials, and increased manufacturing start-up and restructuring costs. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Medical revenues in 2010 declined to 17.3% of revenues from 17.5% of revenues in 2009, primarily due to continued diligent spending controls. Research and development expenses in 2010 increased $8 million, or 7%, and reflected continued investment in the development of new products and platforms.

 

Diagnostics Segment

 

Diagnostics revenues in 2010 of $2.3 billion increased $93 million, or 4.2%, over 2009, which reflected an estimated impact of favorable foreign currency translation of 0.2%, net of hedge losses.

 

The following is a summary of Diagnostics revenues by organizational unit:

 

 

Revenue growth in the Preanalytical Systems unit was driven by sales of safety-engineered products. Sales of safety-engineered products grew 5% in the United States, driven by BD Vacutainer^tm Push Button Blood Collection Set sales, and 7% internationally, which included an estimated favorable foreign exchange impact of 1%, net of hedge losses. The Diagnostic Systems unit experienced growth in worldwide sales of its automated diagnostic platforms, including the molecular BD ProbeTec^tm, BD Viper^tm and BD Affirm^tm systems, along with solid growth of its BD BACTEC^tm blood culture and TB systems and the BD Phoenix^tm ID/AST platform. Revenues related to the flu pandemic were $13 million in 2010 compared with $22 million in 2009 for the Diagnostic Systems unit.

 

Diagnostics operating income in 2010 was $607 million, or 26.2% of Diagnostics revenues, compared with $607 million, or 27.3% of revenues, in 2009. The Diagnostics segment experienced a decline in gross profit margin that reflected unfavorable foreign currency translation and start-up costs associated with acquisitions. This decline was partially offset by sales growth of products that have higher overall gross profit margins, in particular, safety-engineered products and the BD ProbeTec^tm and BD Viper^tm systems. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Diagnostics revenues remained the same in 2010 at 21.2%, due to continued spending controls. Research and development expense increased modestly over 2009 and reflected continued investment in the development of new products and platforms with particular emphasis on our molecular platforms.

 

Biosciences Segment

 

Biosciences revenues in 2010 of $1.3 billion increased $53 million, or 4.4%, over 2009, which reflected an estimated impact of unfavorable foreign currency translation of 2.4% due to hedge losses. Biosciences revenues reflected a larger portion of our hedge losses, which are allocated to the segments based on their proportionate share of international sales of U.S.-produced products.

The following is a summary of Biosciences revenues by organizational unit:

 

 

Revenue growth in the Cell Analysis unit reflected increased demand for instruments and reagents and was aided by governmental economic stimulus programs for research in the U.S. as well as supplemental government funding in Japan. Revenue growth in the Discovery Labware unit reflected increased sales to major biopharmaceutical customers, offset by reduced private label sales compared with 2009.

 

Biosciences operating income in 2010 was $354 million, or 28.2% of Biosciences revenues, compared with $362 million, or 30.1%, in 2009. The decrease in operating income, as a percentage of revenues, reflects lower gross profit from the unfavorable impact of hedge losses, partially offset by the favorable impact of foreign currency translation. Selling and administrative expense was 21.9% in 2010 as compared with 21.6% in 2009 and reflected new direct selling programs and inflationary factors. Research and development expense increased $10 million, or 11% and reflected spending on new product development and advanced technology.

 

Geographic Revenues

 

Revenues in the United States in 2010 of $3.3 billion increased 5%. Overall, growth was led by sales of safety-engineered products, which increased 5% to $1.11 billion from $1.06 billion in 2009, as well as sales of Diabetes Care products. Revenue growth also reflected sales of immunocytometry instruments and reagents, aided by governmental economic stimulus programs in the U.S.

 

International revenues in 2010 of $4.1 billion increased 6%, and reflected nominal impact from net foreign currency translation. Sales growth was led by double-digit growth in Asia Pacific, Latin America and Japan. International sales of safety-engineered devices grew 9.5% to $622 million in 2010 from $568 million in 2009, which included an estimated impact of net favorable foreign currency translation of 1.4%. Sales growth in Western Europe was unfavorably impacted by continuing adverse macroeconomic conditions and an unfavorable comparison to 2009, which included flu-related sales that did not reoccur in 2010.

 

Gross Profit Margin

 

Gross profit margin was 51.9% in 2010, compared with 52.6% in 2009. Gross profit margin in 2010 reflected an estimated unfavorable impact primarily from hedging activity of 90 basis points. Partially offsetting these losses was a net favorable operating performance impact of 20 basis points. Operating performance reflected higher sales of products with higher gross margins, partially offset by higher manufacturing start-up and restructuring costs, higher pension costs, and increases in certain raw material costs.

 

Operating Expenses

 

Selling and administrative expense in 2010 of $1.7 billion, or 23.3% of revenues, increased $41 million, or 2%, compared with $1.7 billion, or 24.1% of revenues, in 2009. This increase reflected $32 million of unfavorable foreign currency translation. Increased spending in 2010 included $18 million in core spending, $16 million related to our global enterprise resource planning initiative to update our business information systems, and $15 million in pension costs. Aggregate expenses for 2009 reflected the $45 million litigation charge previously discussed.

 

Research and development (“R&D”) expense in 2010 was $431 million, or 5.8% of revenues, compared with $405 million, or 5.8% of revenues, in 2009. The increase in R&D expenditures includes spending for new products and platforms in each of our segments, as previously discussed.

Non-Operating Expense and Income

 

Interest expense in 2010 was $51 million, compared with $40 million in 2009. This increase reflected higher levels of long-term fixed rate debt, partially offset by lower interest rates on floating rate debt and a benefit from higher levels of capitalized interest. Interest income was $35 million in 2010, compared with $33 million in 2009. This increase resulted primarily from higher investment levels. Other income (expense), net in 2010 included the gain recognized on the sale of the extended dwell catheter product platform of $18 million and a write-down of investments of $14 million.

 

Income Taxes

 

The effective tax rate in 2010 of 29.2% was higher compared with the 2009 rate of 26.1% and reflected the unfavorable impact of certain unusual items. The 2010 rate was unfavorably impacted by 0.6 percentage points from the expiration of the R&D tax credit, and by 0.5 percentage points from the non-cash charge related to healthcare reform impacting Medicare Part D reimbursements. In addition, the 2009 rate reflected a 1.2 percentage point benefit due to various tax settlements in multiple jurisdictions.

 

Income and Diluted Earnings per Share from Continuing Operations

 

Income from continuing operations and diluted earnings per share from continuing operations in 2010 were $1.2 billion and $4.90, respectively. The non-cash charge related to healthcare reform decreased income from continuing operations and diluted earnings per share from continuing operations in 2010 by $9 million, or 4 cents, respectively. The current year’s earnings also reflected an overall net unfavorable impact of foreign exchange fluctuations of 26 cents, including hedge losses. Income from continuing operations and diluted earnings per share from continuing operations in 2009 were $1.2 million and $4.73, respectively. The tax benefit discussed above increased income from continuing operations and diluted earnings per share from continuing operations in 2009 by $20 million, or 8 cents, respectively. The litigation charge discussed above decreased income from continuing operations and diluted earnings per share from continuing operations in 2009 by $28 million, or 11 cents, respectively.

 

Financial Instrument Market Risk

 

We selectively use financial instruments to manage market risk, primarily foreign currency exchange risk and interest rate risk relating to our ongoing business operations. The counterparties to these contracts are highly rated financial institutions. We do not enter into financial instruments for trading or speculative purposes.

 

Foreign Exchange Risk

 

BD and its subsidiaries transact business in various foreign currencies throughout Europe, Asia Pacific, Canada, Japan and Latin America. We face foreign currency exposure from the effect of fluctuating exchange rates on payables and receivables relating to transactions that are denominated in currencies other than our functional currency. These payables and receivables primarily arise from intercompany transactions. We hedge substantially all such exposures, primarily through the use of forward contracts. We also face currency exposure that arises from translating the results of our worldwide operations, including sales, to the U.S. dollar at exchange rates that have fluctuated from the beginning of a reporting period. From time to time, we purchase forward contracts and options to hedge certain forecasted sales that are denominated in foreign currencies in order to partially protect against a reduction in the value of future sales resulting from 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.

 

Derivative financial instruments are recorded on our balance sheet at fair value. For foreign currency derivatives, 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 upon observable inputs, specifically spot currency rates and foreign currency prices for similar assets and liabilities. With respect to the derivative instruments outstanding at September 30, 2010, a 10% appreciation of the U.S. dollar over a one-year period

would decrease pre-tax earnings by $30 million, while a 10% depreciation of the U.S. dollar would increase pre-tax earnings by $30 million. Comparatively, considering our derivative instruments outstanding at September 30, 2009, a 10% appreciation of the U.S. dollar over a one-year period would have increased pre-tax earnings by $85 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings by $85 million. These calculations do not reflect the impact of exchange gains or losses on the underlying transactions that would substantially offset the results of the derivative instruments.

 

Interest Rate Risk

 

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, 2010 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 appropriate 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, fair values are provided by the financial institutions that are counterparties to these arrangements. Market risk for these instruments is determined by calculating the impact to fair value of an assumed change in interest rates across all maturities. A change in interest rates on short-term debt and interest-bearing investments impacts our earnings and cash flow, but not the fair value of these instruments because of their limited duration. A change in interest rates on long-term debt is assumed to impact the fair value of the debt, but not our earnings or cash flow because the interest on such obligations is fixed. Based on our overall interest rate exposure at September 30, 2010 and 2009, 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, 2010 and 2009 by approximately $56 million and $66 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, 2010 and 2009 by approximately $59 million and $71 million, respectively.

 

Liquidity and Capital Resources

 

Net Cash Flows from Continuing Operating Activities

 

Net cash provided by continuing operating activities in 2010 was $1.7 billion, unchanged from 2009. The change in operating assets and liabilities resulted from a net use of cash and reflected higher levels of accounts receivable and inventory. Net cash provided by continuing operating activities was reduced by discretionary cash contributions to the U.S. pension plan of $175 million and $75 million in 2010 and 2009, respectively.

 

Net Cash Flows from Continuing Investing Activities

 

Capital Expenditures

 

Capital expenditures were $537 million in 2010, compared with $585 million in 2009. Capital spending for the Medical, Diagnostics and Biosciences segments in 2010 was $369 million, $109 million and $50 million, respectively, and related primarily to manufacturing capacity expansions.

 

Acquisitions of Businesses

 

In November 2009, we acquired 100% of the outstanding shares of HandyLab, Inc., a company that develops and manufactures molecular diagnostic assays and automation platforms, for a net cash payment of $275 million. For further discussion refer to Note 9 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data.

 

Divestiture of Businesses

 

On July 30, 2010, the Company sold the Ophthalmic Systems unit and the surgical blades platform. The sale of the critical care and extended dwell catheter product platforms was completed on September 30, 2010.

Cash proceeds received in the fourth quarter 2010 from these divestitures were $260 million, net of working capital adjustments. For further discussion refer to Note 10 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data.

 

Net Cash Flows from Continuing Financing Activities

 

Debt Issuances and Payments of Obligations

 

The change in short-term debt reflected the repayment of $200 million of 7.15% Notes, due October 1, 2009, using the proceeds from the issuance of $500 million of 10-year, 5.00% Notes and $250 million of 30-year, 6.00% Notes in May 2009. Short-term debt decreased to 12% of total debt at the end of 2010, from 21% at the end of 2009. Floating rate debt was 24% of total debt at the end of 2010 and 32% at the end of 2009. Our weighted average cost of total debt at the end of 2010 was 4.6%, down from 4.9% at the end of 2009. Debt-to-capitalization (ratio of total debt to the sum of total debt, shareholders’ equity and net non-current deferred income tax liabilities) at September 30, 2010 was 23.7% compared to 26.8% at September 30, 2009.

 

On November 8, 2010, we issued $700 million of 10-year 3.25% Notes and $300 million of 30-year 5.00% Notes. The net proceeds from these issuances are expected to be used for general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of our common stock and acquisitions.

 

Repurchase of Common Stock

 

We repurchased approximately 10.1 million shares of our common stock for $750 million in 2010 and 8.2 million shares for $550 million in 2009. In September 2010, our Board of Directors authorized the repurchase of an additional 21 million shares. When combined with the remaining shares under the November 2009 Board of Directors’ repurchase authorization, there is a total of approximately 29 million common shares available for purchase at September 30, 2010. We plan on share repurchases of $1.5 billion in 2011 and $600 million in 2012, which are expected to be funded by cash flows from operating activities and the issuance of debt.

 

Credit Facilities

 

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, 2010. We maintain a $1 billion syndicated credit facility in order to provide backup support for our commercial paper program and for other general corporate purposes. This credit facility expires in December 2012 and includes a single financial covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio had ranged from 26-to-1 to 34-to-1. There were no borrowings outstanding under this facility at September 30, 2010. In addition, we have informal lines of credit outside the United States.

 

Access to Capital and Credit Ratings

 

BD’s ability to generate cash flow from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected in the event there was a material decline in the demand for BD’s products, deterioration in BD’s key financial ratios or credit ratings or other significantly unfavorable changes in conditions.

BD’s credit ratings at September 30, 2010 were as follows:

 

 

While deterioration in BD’s credit ratings would increase the costs associated with maintaining and borrowing under its existing credit arrangements, such a downgrade would not affect its ability to draw on these credit facilities, nor would it result in an acceleration of the scheduled maturities of any outstanding debt. BD believes that given its debt ratings, its conservative financial management policies, its ability to generate cash flow and the non-cyclical, geographically diversified nature of its businesses, it would have access to additional short-term and long-term capital should the need arise.

 

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 BD’s significant contractual obligations and related scheduled payments:

 

 

 

 

2009 Compared With 2008

 

Results of Continuing Operations

 

Worldwide revenues in 2009 of $7.0 billion increased 1% from 2008 and reflected volume increases of approximately 5%, and price increases of less than 1%, which were partially offset by net unfavorable foreign currency translation of 4%, after factoring in hedge gains.

Comparisons of income from continuing operations between 2009 and 2008 are affected by the following significant items that are reflected in our 2009 financial results:

 

 

Medical Segment

 

Medical revenues in 2009 of $3.6 billion increased $14 million, or 0.4%, over 2008, as volume growth was mostly offset by an estimated impact of unfavorable foreign currency translation of 5.5 percentage points, net of hedge gains.

 

The following is a summary of Medical revenues by organizational unit:

 

 

 

 

On a foreign currency-neutral basis, revenue growth of the Medical Surgical Systems unit continued to be driven by sales in safety-engineered products and prefilled flush syringes. Revenues of safety-engineered products increased 2% in the United States and 12% internationally, which included an estimated unfavorable foreign exchange impact of 11%, net of hedge gains. Revenue growth in the Diabetes Care unit resulted primarily from worldwide pen needle sales. Revenue growth in the Pharmaceutical Systems unit was driven by growth in Europe and Asia Pacific, offset by lower sales in the United States when compared with 2008, which included non-recurring sales to companies producing certain generic heparin products. Revenues related to the H1N1 pandemic were $30 million for the Medical Surgical Systems unit and $25 million for the Pharmaceutical Systems unit in 2009.

 

Medical operating income in 2009 was $1.0 billion, or 29.5% of Medical revenues, as compared with $1.0 billion, or 28.4% of revenues, in 2008. Operating income as a percentage of revenues reflected an increase in gross profit margin primarily resulting from favorable currency translation, including hedge gains, and a modest benefit from lower raw materials cost, which was partially offset by increased manufacturing start-up costs. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Medical revenues in 2009 declined to 17.5% of revenues, from 17.9% of revenues in 2008, primarily due to tight spending controls. Research and development expenses in 2009 increased $16 million, or 15%, reflecting continued investment in the development of new products and platforms.

 

Diagnostics Segment

 

Diagnostics revenues in 2009 of $2.2 billion increased $66 million, or 3%, over 2008. Revenues in 2009 reflected an estimated unfavorable impact of foreign currency translation of 4 percentage points, net of hedge gains.

The following is a summary of Diagnostics revenues by organizational unit:

 

 

Revenue growth in the Preanalytical Systems unit was driven by sales of safety-engineered products. Sales of safety-engineered products grew 6% in the United States, driven by BD Vacutainer^TM Push Button Blood Collection Set sales, and 4% internationally, which included an estimated unfavorable foreign exchange impact of 10%, net of hedge gains. The Diagnostic Systems unit experienced growth in worldwide sales of its automated diagnostic platforms, including the molecular BD ProbeTec^TM, BD Viper^TM and BD Affirm^TM systems, along with solid growth of its BD BACTEC^TM blood culture and TB systems and the BD Phoenix^TM ID/AST platform. Revenues of flu-related products were $22 million in 2009. In addition, revenues from TriPath grew $11 million to $130 million and revenues from GeneOhm grew $9 million to $51 million in 2009.

 

Diagnostics operating income was $607 million, or 27.3% of Diagnostics revenues, in 2009, compared with $526 million, or 24.3% of revenues, in 2008. The Diagnostics Segment experienced an improvement in gross profit margin from sales growth of products that have higher overall gross profit margins, in particular, safety-engineered products and the BD ProbeTec^TM and BD Viper^TM systems. This was partially offset by increases in raw material costs and unfavorable foreign exchange. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Diagnostics revenues in 2009 was 21.2%, compared with 22.0% in 2008, primarily due to tight spending controls. Research and development expense increased $10 million, or 7%, reflecting continued investment in the development of new products and platforms, with particular emphasis on our molecular platforms.

 

Biosciences Segment

 

Biosciences revenues in 2009 of $1.2 billion increased $9 million, or 1%, over 2008, which reflected an estimated impact of unfavorable foreign currency translation of 1 percentage point, net of hedge gains.

 

The following is a summary of Biosciences revenues by organizational unit:

 

 

 

 

Revenue growth in the Cell Analysis unit reflected lessening demand for instruments and research reagents, caused primarily by adverse economic conditions in the U.S. that resulted in funding constraints and lower demand for capital equipment. The unit was also impacted by reduced research spending in other regions. Revenue growth in the Discovery Labware unit was adversely impacted by reduced sales to a major bionutrients customer compared with 2008. Biosciences revenues reflected a larger portion of our hedge gains, which are allocated to the segments based on their proportionate share of international sales of U.S.-produced products.

Biosciences operating income in 2009 was $362 million, or 30.1% of Biosciences revenues, compared with $334 million, or 27.9%, in 2008. The increase in operating income, as a percentage of revenues, reflects gross profit improvement from the favorable impact of foreign currency translation, including hedge gains. See further discussion on gross profit margin below. In addition, selling and administrative expense as a percentage of Biosciences revenues declined in 2009 to 21.6% from 23.0% in 2008, primarily due to tight spending controls. Research and development expense in 2009 was flat compared with 2008.

 

Geographic Revenues

 

Revenues in the United States in 2009 of $3.1 billion increased 3%. Overall, growth was led by sales of safety-engineered products, which increased 4% to $1.1 billion, as well as sales of Diabetes Care products. Revenue growth was adversely impacted by lower sales of immunocytometry instruments and reagents and Pharmaceutical Systems products, as previously discussed.

 

International revenues in 2009 of $3.9 billion were relatively flat compared with 2008, as increased sales volume was offset by an estimated impact of unfavorable foreign currency translation of 7 percentage points, net of hedge gains. Volume growth was led by sales in Western Europe, Asia Pacific and Latin America. International sales of safety-engineered devices grew 6.5% to $568 million in 2009 from $533 million in 2008 and reflected an estimated 10 percentage points of unfavorable foreign currency translation.

 

Gross Profit Margin

 

Gross profit margin increased to 52.6% in 2009, from 51.3% in 2008. Gross profit margin in 2009 reflected an estimated favorable impact of 140 basis points from both foreign currency translation and the hedging of certain foreign currencies and 20 basis points from lower raw materials cost. Partially offsetting these gains were increases in manufacturing start-up costs of approximately 30 basis points.

 

Operating Expenses

 

Selling and administrative expense in 2009 was $1.7 billion, or 24.1% of revenues, compared with $1.7 billion, or 24.2% of revenues, in 2008. Aggregate expenses reflected the $45 million litigation charge previously discussed and $48 million of increased core spending. These increases were partially offset by $82 million of favorable foreign exchange impacts.

 

R&D expense in 2009 was $405 million, or 5.8% of revenues, compared with $383 million, or 5.5% of revenues, in 2008. The increase in R&D expenditures includes spending for new products and platforms in the Medical and Diagnostics segments, as previously discussed.

 

Operating Income

 

Operating margin in 2009 was 22.8% of revenues, compared with 21.6% in 2008. The litigation charge noted above decreased operating margin in 2009 by 60 basis points.

 

Non-Operating Expense and Income

 

Interest expense was $40 million in 2009, compared with $36 million in 2008. This increase reflected higher debt levels offset, in part, by lower interest rates on floating rate debt. Interest income was $33 million in 2009, compared with $39 million in 2008. This decrease was primarily attributable to the impact of lower interest rates on floating rate investments.

 

Income Taxes

 

The effective tax rate in 2009 was 26.1% compared with the 2008 rate of 27.7%, and reflected a 1.2% benefit due to various tax settlements in multiple jurisdictions.

Income and Diluted Earnings per Share from Continuing Operations

 

Income from continuing operations and diluted earnings per share from continuing operations in 2009 were $1.2 billion and $4.73, respectively. The tax benefit discussed above increased income from continuing operations and diluted earnings per share from continuing operations in 2009 by $20 million, or 8 cents, respectively. The litigation charge discussed above decreased income from continuing operations and diluted earnings per share from continuing operations in 2009 by $28 million, or 11 cents, respectively. Income from continuing operations and diluted earnings per share from continuing operations in 2008 were $1.1 million and $4.27, respectively.

 

Discontinued Operations

 

In July 2009, the Company sold certain assets and liabilities related to the elastics and thermometer components of the Home Healthcare product line of the Medical segment for $51 million. See Note 10 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data for additional discussion.

 

Liquidity and Capital Resources

 

Net Cash Flows from Continuing Operating Activities

 

Net cash provided by continuing operating activities in 2009 was $1.7 billion, compared with $1.6 billion in 2008. Net income, excluding non-cash items (primarily depreciation, amortization, share-based compensation and deferred income taxes), was the primary source of operating cash flow during 2009. The change in operating assets and liabilities was a net use of cash and reflected higher levels of accounts receivable and inventory.

 

Net Cash Flows from Continuing Investing Activities

 

Net cash used for continuing investing activities in 2009 was $1.1 billion, compared with $777 million in 2008. Capital expenditures were $585 million in 2009, compared with $596 million in 2008. Capital spending for the Medical, Diagnostics and Biosciences segments was $408 million, $102 million and $56 million, respectively, in 2009 and related primarily to manufacturing capacity expansions. The increase in cash used for purchases of short-term investments is primarily related to the temporary investment of proceeds from the long-term debt issuance discussed below. The increase in cash used for capital software investment is primarily related to our global enterprise resource planning initiative to upgrade our business information systems.

 

Net Cash Flows from Continuing Financing Activities

 

Net cash used for financing activities was $80 million in 2009, as compared with $586 million in 2008. In May 2009, we issued $500 million of 10-year, 5.00% Notes and $250 million of 30-year, 6.00% Notes, the proceeds of which were used to repay $200 million of 7.15% Notes, due October 1, 2009, to fund a discretionary pension contribution of $175 million in October 2009, and for general corporate purposes. Total debt was $1.9 billion and $1.2 billion at September 30, 2009 and 2008, respectively. Short-term debt increased to 21% of total debt at the end of 2009, from 17% at the end of 2008. Floating rate debt was 32% of total debt at the end of 2009 and 35% at the end of 2008. Our weighted average cost of total debt at the end of 2009 was 4.9%, unchanged from the end of 2008. Debt-to-capitalization at the end of 2009 increased to 26.8% compared with 18.8% in 2008, primarily due to our debt issuance.

 

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, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. Actual results that differ from management’s estimates could have an unfavorable effect on 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 typically recognized when title and risk of loss pass to the customer. However, we recognize revenue for certain instruments sold from the Biosciences segment upon installation at a customer’s site, as installation of these instruments is considered a significant post-delivery obligation. In addition, for certain sales arrangements, primarily in the U.S., with multiple deliverables, revenue and cost of products sold are recognized at the completion of each deliverable: shipment, installation and training. These sales agreements are divided into separate units of accounting and revenue is recognized upon the completion of each deliverable based on the relative fair values of items delivered. Fair values are generally determined based on sales of the individual deliverables to third parties.

 

BD’s 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

 

Goodwill and indefinite-lived intangible assets are subject to impairment reviews at least annually, or whenever indicators of impairment arise. Potential impairment is identified by comparing the fair value of a reporting unit with its carrying value. Our annual goodwill impairment test for 2010 did not result in an impairment, as the fair value of each reporting unit exceeded its carrying value. Intangible assets other than goodwill and indefinite-lived intangible assets and other long-lived assets are reviewed annually for impairment, or when impairment indicators are present. Impairment reviews are based on an income approach which is based on the present value of future cash flows. This approach 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 BD’s 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 BD’s results of operations. Actual results may differ from management’s estimates.

 

Income Taxes

 

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.

 

BD conducts business and files tax returns in numerous countries and currently has tax audits in progress in a number of tax jurisdictions. In evaluating the exposure associated with various tax filing positions, we record reserves for uncertain tax positions based on the technical support for the positions, our past audit experience with similar situations, and the potential interest and penalties related to the matters. BD’s effective tax rate in any given period could be impacted if, upon resolution with taxing authorities, we prevailed in positions for which reserves have been established, or we were required to pay amounts in excess of established reserves.

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, antitrust and environmental matters, as further discussed in Note 5 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. 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 BD’s consolidated results of operations and consolidated net cash flows.

 

Benefit Plans

 

We have significant net pension and other postretirement benefit costs that are measured using actuarial valuations. Pension benefit costs include assumptions for the discount rate and expected return on plan assets. Other postretirement benefit plan costs include assumptions for the discount rate and healthcare cost trend rates. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 8 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data for additional discussion.

 

The discount rate is selected each year based on investment grade bonds and other factors as of the measurement date (September 30). For the U.S. pension plan, we used a discount rate of 5.2% as of September 30, 2010, which was based on an actuarially-determined, company-specific yield curve. The rate selected is used to measure liabilities as of the measurement date and for calculating the following year’s pension expense. The expected long-term rate of return on plan assets assumption, although reviewed each year, changes less frequently due to the long-term nature of the assumption. This assumption does not impact the measurement of assets or liabilities as of the measurement date; rather, it is used only in the calculation of pension expense. To determine the expected long-term rate of return on pension plan assets, we consider many factors, including our historical assumptions compared with actual results; benchmark data; expected returns on various plan asset classes, as well as current and expected asset allocations. At September 30, 2010, we used a long-term expected rate of return on plan assets assumption of 8.00% for the U.S. pension plan. We believe our discount rate and expected long-term rate of return on plan assets assumptions are appropriate based upon the above factors.

 

Sensitivity to changes in key assumptions for our U.S. pension and other postretirement plans are as follows:

 

 

Share-Based Compensation

 

Compensation cost relating to share-based payment transactions is recognized in net income using a fair value measurement method. All share-based payments to employees, including grants of employee stock options, are recognized in the statement of operations as compensation expense (based on their fair values) over the vesting period of the awards. We determine the fair value of certain share-based awards using a lattice-based binomial option valuation model that incorporates certain assumptions, such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options. See Note 7 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data for additional discussion.

 

Cautionary Statement Regarding Forward-Looking Statements

 

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 filings with the Securities and Exchange Commission, press releases, and our reports to shareholders. Forward-looking statements may be identified by the use of words such as “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 future — including statements relating to volume growth, sales and earnings per share growth, cash flows or uses, and statements expressing views about future operating results — are forward-looking statements.

 

Forward-looking statements are based on current expectations of future events. The forward-looking statements are, and will be, based on management’s then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events and developments or otherwise, except as required by applicable law or regulations.

 

The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements. For further discussion of certain of these factors, see Item 1A. Risk Factors.

 

 

 

 

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.

 

 

The information required by this item is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in Notes 1, 12 and 13 to the consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data, and is incorporated herein by reference.

 

Reports of Management

 

Management’s 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 Company’s assets, management employs a system of internal accounting controls designed to provide reasonable assurance, at appropriate cost, that the Company’s assets are protected and that transactions are appropriately authorized, recorded and summarized. This system of control is supported by the selection of qualified personnel, by organizational assignments that provide appropriate delegation of authority and division of responsibilities, and by the dissemination of written policies and procedures. This control structure is further reinforced by a program of internal audits, including a policy that requires responsive action by management.

 

The Board of Directors monitors the internal control system, including internal accounting and financial reporting controls, through its Audit Committee, which consists of seven 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.

 

Management’s 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, 2010.

 

The financial statements and internal control over financial reporting have been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young’s reports with respect to fairness of the presentation of the statements, and the effectiveness of internal control over financial reporting, are included herein.

 

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, 2010 and 2009, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three years in the period ended September 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with 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, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2010, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Becton, Dickinson and Company’s internal control over financial reporting as of September 30, 2010, 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 24, 2010 expressed an unqualified opinion thereon.

 

 

New York, New York

November 24, 2010

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors of

Becton, Dickinson and Company

 

We have audited Becton, Dickinson and Company’s internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Becton, Dickinson and Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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 company’s 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 company’s 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 company’s 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, Becton, Dickinson and Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010, 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, 2010 and 2009, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three years in the period ended September 30, 2010 of Becton, Dickinson and Company, and our report dated November 24, 2010 expressed an unqualified opinion thereon.

 

 

New York, New York

November 24, 2010

Becton, Dickinson and Company

 

Consolidated Statements of Income

 

 

See notes to consolidated financial statements

Becton, Dickinson and Company

 

Consolidated Statements of Comprehensive Income

 

 

See notes to consolidated financial statements

Becton, Dickinson and Company

 

Consolidated Balance Sheets

 

 

See notes to consolidated financial statements

Becton, Dickinson and Company

 

Consolidated Statements of Cash Flows

 

 

See notes to consolidated financial statements

Becton, Dickinson and Company

 

Notes to Consolidated Financial Statements

Thousands of dollars, except per share amounts and numbers of shares

 

Note 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.

 

Cash Equivalents

 

Cash equivalents consist of all highly liquid investments with a maturity of three months or less at time of purchase.

 

Short-Term Investments

 

Short-term investments consist of time deposits with maturities greater than three months and less than one year when purchased.

 

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 amortization are principally provided on the straight-line basis over estimated useful lives, which range from 20 to 45 years for buildings, four to 10 years for machinery and equipment and one to 20 years for leasehold improvements. Depreciation and amortization expense was $347,402, $312,321 and $300,384 in fiscal 2010, 2009 and 2008, respectively.

 

Goodwill and Other Intangible Assets

 

Goodwill, core and developed technology, and in-process research and development assets arise from acquisitions. Goodwill and in-process research and development assets are reviewed annually for impairment. Potential impairment of goodwill is identified by comparing the fair value of a reporting unit, estimated using an income approach, with its carrying value. Reporting units generally represent one level below reporting segment. The annual impairment review performed in fiscal year 2010 indicated that all reporting units’ fair value exceeded their respective carrying value. The review for impairment of in-process research and development assets as well as core and developed technology compares the fair value of the technology or project assets, estimated using an income approach, with their carrying value. Core and developed technology are amortized over periods ranging from 15 to 20 years, using the straight-line method.

 

Other intangibles with finite useful lives, which include patents, are amortized over periods principally ranging from one 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. 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, and are reviewed annually for impairment.

Becton, Dickinson and Company

 

Notes to Consolidated Financial Statements — (Continued)

 

Capitalized Software

 

Capitalized software, including costs for 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. The current balance primarily includes capital software investments related to a global enterprise resource planning initiative to upgrade the Company’s business information systems. Amortization for this project has not commenced because the program has not yet been placed in service. Amortization expense related to capitalized software was $32,181, $46,485 and $56,368 for 2010, 2009 and 2008, respectively.

 

Foreign Currency Translation

 

Generally, foreign subsidiaries’ functional currency is the local currency of operations and 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) income.

 

Revenue Recognition

 

Revenue from product sales is recognized when title and risk of loss pass to the customer. The Company recognizes revenue for certain instruments sold from the Biosciences segment upon installation at a customer’s site, as installation of these instruments is considered a significant post-delivery obligation. For certain sales arrangements, primarily in the U.S., with multiple deliverables, revenue and cost of products sold are recognized at the completion of each deliverable: shipment, installation and training. These sales agreements 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. Fair values are generally determined based on sales of the individual deliverables to other third parties.

 

The Company’s 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 based upon estimates and 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 $255,765, $250,941 and $263,504 in 2010, 2009 and 2008, respectively.

 

Derivative Financial Instruments

 

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.

 

Derivative financial instruments are utilized by the Company in the management of its foreign currency and interest rate exposures. From time to time, the Company hedges forecasted sales denominated in foreign currencies using forward and option contracts to protect against the reduction in value of forecasted foreign currency cash flows resulting from export sales. The Company also periodically utilizes interest rate swaps to maintain a balance between fixed and floating rate instruments. The Company does not enter into derivative financial instruments for trading or speculative purposes.