PORTIONS OF 2000 ANNUAL REPORT TO SHAREHOLDERS
Published on December 21, 2000
EXHIBIT 13
Becton, Dickinson and Company
Summary
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Nine-Year Summary of Selected Financial Data
Years Ended September 30
Dollars in millions, except per-share amounts
(A) Includes cumulative effect of accounting changes of $141.1 ($.47 per basic
share; $.45 per diluted share).
(B) Earnings before interest expense and taxes as a percent of average total
assets.
(C) Excludes the cumulative effect of accounting changes.
(D) Total debt as a percent of the sum of total debt, shareholders' equity and
net non-current deferred income tax liabilities.
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Becton, Dickinson and Company
Financial Review
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Company Overview
Becton, Dickinson and Company ("BD") is a medical technology company that
manufactures and sells a broad range of supplies, devices and systems for use by
healthcare professionals, medical research institutions, industry and the
general public. We focus strategically on achieving growth in three worldwide
business segments-BD Medical Systems ("Medical"), BD Biosciences ("Biosciences")
and BD Preanalytical Solutions ("Preanalytical"). Our products are marketed in
the United States and internationally through independent distribution channels,
directly to end users, and by sales representatives. The following references to
years relate to our fiscal year, which ends on September 30.
We now generate close to 50% of our revenues outside the United States.
While demand for healthcare products and services continues to be strong
worldwide, the ongoing focus on healthcare cost containment around the world, as
well as competition in the healthcare marketplace and consolidation in our
customer base, have resulted in pricing pressures, particularly in the Medical
segment. We will continue to manage these issues by capitalizing on our
market-leading positions in many of our product offerings and by leveraging our
cost structure.
In the Medical segment, we believe the introduction of new products and the
pursuit of other new opportunities provide avenues for continued growth in the
healthcare environment. In particular, the U.S. market is poised for broadscale
conversion to advanced protection devices due to the growing awareness of
benefits of protecting healthcare workers against accidental needlesticks and
recently-enacted state and federal legislation requiring use of
safety-engineered devices.
The global bioscience business is emerging as a leading growth industry for
the new century, as evidenced by recent advances such as sequencing the human
genome. Biosciences is a cutting edge toolmaker for science and medicine. Our
products serve researchers and laboratories around the world. We are a leader in
a number of platforms in the Biosciences segment. In the last few years, we made
key acquisitions in the areas of immunology, cell biology, molecular biology and
gene cloning. Growth in research products is driven by the expansion in genomic
research and increased pharmaceutical and government spending in this area.
In the Preanalytical segment, we have strong market-leading positions. We
also have opportunities for further growth in this segment from the U.S. market
conversion to advanced protection devices. In addition, there is potential for
further growth within our core business. For example, we estimate that only half
of the world is converted to evacuated blood collection systems, one of our
principal products in this segment.
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Revenues and Earnings
Worldwide revenues in 2000 were $3.6 billion, an increase of 6% over 1999.
Unfavorable foreign currency translation impacted revenue growth by 2%.
Underlying revenue growth was 5%, excluding the effects of foreign currency
translation and acquisitions and resulted primarily from volume increases in all
segments. During the fourth quarter of 2000, we discontinued certain incentive
programs with distributors in order to improve supply chain and manufacturing
efficiencies, reduce costs and establish closer links with customers. The
discontinuance of these incentive programs resulted in an estimated reduction in
revenues in 2000 of approximately $50 million.
Medical revenues in 2000 increased 2% over 1999 to $2.0 billion, with
acquisitions contributing 1%. Unfavorable foreign currency translation impacted
revenue growth by an estimated 3%. The underlying revenue growth was 6%,
excluding the estimated impact of the discontinuance of certain distributor
incentive programs and the effect of product lines exited in 1999. Conversion of
the U.S. market to advanced protection devices, increased sales of auto-destruct
syringes to world health organizations and strong sales of prefillable syringes
to pharmaceutical companies contributed to this growth.
Medical operating income in 2000 was $371 million. Medical operating income
in 2000 and 1999 was negatively impacted by special and other charges which are
discussed below. Excluding these items in both years and the incremental impact
of acquisitions, Medical operating income decreased 4% over the prior year
reflecting lower sales in the United States resulting from the impact of the
discontinuance of certain distributor incentive programs, cost containment
pricing pressures, and the unfavorable impact of foreign currency translation.
We also experienced slightly lower gross profit margins on our newer advanced
protection devices, reflecting a not yet fully automated manufacturing process.
Biosciences revenues in 2000 increased 13% over 1999 to $1.1 billion, with
acquisitions contributing 7%. Unfavorable foreign currency translation impacted
revenues by an estimated 2%. The underlying revenue growth of 8% was led by
strong sales of BD FACS brand flow cytometry systems and BD PharMingen brand
reagents. Tissue culture products also exhibited good revenue growth. Although
infectious disease product revenues continue to be adversely affected by cost
containment in testing, revenues grew at a faster rate in 2000 than in 1999 due
to strong sales of clinical immunology products.
Biosciences operating income in 2000 was $128 million. Excluding the impact
in both years of special charges, purchased in-process research and development
charges and the incremental impact of acquisitions, Biosciences operating income
increased 9% over the prior year. This performance primarily reflects an
improved sales mix, partially offset by increased research and development
spending in the area of genomic research and charges of $5 million for product
notification costs and inventory write-offs in the fourth quarter of 2000.
These costs were associated with the temporary market withdrawal of certain
products acquired in 1999 that are being redesigned for re-introduction.
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Becton, Dickinson and Company
Preanalytical revenues in 2000 rose 5% to $535 million. Unfavorable foreign
currency translation impacted revenues by an estimated 3%. The underlying
revenue growth of 8% was led by strong sales of advanced protection products and
geographic expansion, offset in part by the impact of the discontinuance of
certain distributor incentive programs and continued cost containment pricing
pressures.
Preanalytical operating income was $123 million in 2000. Excluding special
charges in both years, Preanalytical operating income decreased 1% over the
prior year, reflecting the impact of the lower sales in the United States
resulting from the discontinuance of certain distributor incentive programs and
the unfavorable impact of foreign currency translation.
On a geographic basis, revenues outside the United States in 2000 increased
5% to $1.8 billion. Excluding the estimated impact of unfavorable foreign
currency translation of 5%, primarily in Europe, revenues outside the United
States grew 10%, with acquisitions contributing 2%. The underlying revenue
growth was led by strong sales of prefillable syringes, BD FACS brand flow
cytometry systems in Europe and clinical immunology products in Japan. In
addition, increased revenues in the Asia Pacific and Latin America regions
contributed to the growth. Continued healthcare cost containment initiatives and
certain other pricing pressures in Europe negatively impacted Medical segment
revenues.
Revenues in the United States in 2000 were $1.9 billion, an increase of 7%,
with acquisitions contributing 4%. Excluding acquisitions and the unfavorable
effect of discontinuing certain distributor incentive programs, revenues in the
United States grew 6%, reflecting strong sales in advanced protection devices
and BD FACS brand flow cytometry systems. Revenue growth of infectious disease
diagnostic products was 3%, an improvement from prior periods due to strong
clinical immunology product performance, primarily in the area of respiratory
testing.
Special charges of $58 million were recorded in 2000. These charges
included $32 million relating to severance costs and $6 million of impaired
assets and other exit costs associated with a worldwide organizational
restructuring, which resulted in the termination of approximately 600 employees.
Special charges in 2000 also included $20 million for estimated litigation
defense costs associated with our divested latex gloves business. See
"Litigation" section below for additional discussion. We also recorded other
charges of $13 million in cost of products sold in the second quarter of 2000
relating to the recall of certain manufacturing lots of the BD Insyte Autoguard
Shielded IV Catheter. These charges consisted primarily of costs associated with
product returns, disposal of the affected product, and other direct recall
costs. We have since adjusted our Insyte Autoguard manufacturing process to
address the situation, and shipments of this product resumed at the beginning of
the third quarter. During 1999, we recorded special charges of $76 million
associated with the exiting of product lines and other activities, primarily in
the area of home healthcare, the impairment of assets and an enhanced voluntary
retirement incentive program. We also recorded other charges of $27 million in
cost of products sold in 1999 to reflect the write-off of inventories and to
provide appropriate reserves for expected future returns relating to the exited
product lines. For additional discussion of these charges, see Note 5 of the
Notes to Consolidated Financial Statements.
Gross profit margin was 48.9% in 2000, compared with 49.9% last year.
Excluding the unfavorable impact of the previously discussed other charges in
both years, gross profit margin would have been 49.3% and 50.7% in 2000 and
1999, respectively. This decline reflects a less profitable mix of products
sold, pricing pressures in certain markets, higher costs associated with the
production scale-up of advanced protection devices. Modest gross profit margin
improvement is expected in 2001 as we increase automation of our advanced
protection manufacturing processes.
Selling and administrative expense of $974 million in 2000 was 26.9% of
revenues, compared to the prior year's ratio of 27.3%. Savings achieved through
spending controls and productivity improvements more than offset increased
investment relating to advanced protection programs, the impact of acquisitions,
and additional expense relating to the enterprise-wide program to upgrade our
business information systems ("Genesis").
Investment in research and development in 2000 was $224 million, or 6.2% of
revenues, including a current year $5 million charge for purchased in-process
research and development. This charge represented the fair value of certain
acquired research and development projects in the area of cancer diagnostics
which were determined not to have reached technological feasibility and which do
not have alternative future uses. Research and development expense in 1999 also
included in-process research and development charges of $49 million in
connection with business acquisitions. Excluding these charges in both years,
research and development would have been 6% of revenues in both 2000 and 1999.
Operating income in 2000 was $515 million, compared to last year's $445
million. Excluding special and other charges and purchased in-process research
and development charges in both years, operating income would have been 16.3%
and 17.4% of revenues in 2000 and 1999, respectively. This decline primarily
reflects the decrease in gross profit margin partially offset by selling and
administrative expense leverage.
Net interest expense of $74 million in 2000 was $2 million higher than in
1999. The impact in 2000 of additional 1999 borrowings to fund acquisitions was
partially offset by interest refunds received in connection with the recent
conclusion of a number of tax examinations.
Gains on investments included $73 million in 2000 relating to the sale of
two equity investments, which are described more fully in Note 6 in the "Notes
to Consolidated Financial Statements."
"Other income (expense), net" in 2000 was $4 million higher compared to the
prior year. The favorable effect of lower foreign exchange losses, settlements
and a gain on an investment hedge in 2000 were partially offset by net losses
relating to assets held for sale.
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Financial Review Becton, Dickinson and Company
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The effective tax rate in 2000 was 24.4%, compared to 26.0% in 1999. The
lower tax rate resulted principally from adjustments relating to the recent
conclusion of a number of tax examinations.
Net income in 2000 was $393 million, compared to $276 million in 1999.
Diluted earnings per share were $1.49 in 2000, compared to $1.04 in 1999.
Excluding special and other charges and purchased in-process research and
development charges in both years, as well as the investment gains and favorable
tax effect discussed above, earnings per share would have been unchanged from
last year.
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Financial Instrument Market Risk
We selectively use financial instruments to manage the impact of foreign
exchange rate and interest rate fluctuations on earnings. The counterparties to
these contracts are highly-rated financial institutions, and we do not have
significant exposure to any one counterparty. We do not enter into financial
instruments for trading or speculative purposes.
Our foreign currency exposure is primarily in Western Europe; Asia Pacific;
Japan; South Latin America, including Brazil; and North Latin America, including
Mexico. We face transactional currency exposures that arise when we enter into
transactions in non-hyperinflationary countries, generally on an intercompany
basis, that are denominated in currencies other than functional currency. We
hedge substantially all such foreign exchange exposures primarily through the
use of forward contracts and currency options. We also face currency exposure
that arises from translating the results of our worldwide operations to the U.S.
dollar at exchange rates that have fluctuated from the beginning of the period.
We began to purchase option contracts at the end of 2000 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. With respect to the derivative instruments
outstanding at September 30, 2000, a 10% appreciation of the U.S. dollar over a
one-year period would increase pre-tax earnings by $46 million, while a 10%
depreciation of the U.S. dollar would decrease pre-tax earnings by $7 million.
Comparatively, considering our derivative instruments outstanding at September
30, 1999, a 10% appreciation or depreciation of the U.S. dollar over a one-year
period would not have had a material effect on our earnings. These calculations
do not reflect the impact of exchange gains or losses on the underlying
positions that would be offset, in part, by the results of the derivative
instruments.
Our primary interest rate exposure results from changes in short-term U.S.
dollar interest rates. In an effort to manage interest rate exposures, we strive
to achieve an acceptable balance between fixed and floating rate debt and may
enter into interest rate swaps to help maintain that balance. Based on our
overall interest rate exposure at September 30, 2000 and 1999, 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 at September 30, 2000 and 1999 by approximately
$46 million and $54 million, respectively. A 10% decrease in interest rates
would increase the fair value of our long-term debt at September 30, 2000 and
1999 by approximately $52 million and $61 million, respectively.
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Liquidity and Capital Resources
Cash provided by operations continued to be our primary source of funds to
finance operating needs and capital expenditures. In 2000, net cash provided by
operating activities was $615 million, compared to $432 million in 1999. This
increase primarily reflects lower trade receivables compared with last year.
Capital expenditures were $376 million in 2000, compared to $312 million in
the prior year. Medical and Preanalytical capital spending, which totaled $247
million and $47 million, respectively in 2000, included spending for capital
expansion for advanced protection devices. Biosciences capital spending, which
totaled $53 million in 2000, included spending on new manufacturing facilities.
Funds expended outside the above segments included amounts related to Genesis.
Net cash used for financing activities was $219 million in 2000 as compared
to net cash provided of $365 million during 1999. During 2000, total debt
decreased $168 million, primarily as a result of increased funds from operations
and improved working capital management, particularly in the area of accounts
receivable. Short-term debt was 45% of total debt at year end, compared to 40%
at the end of 1999. Our weighted average cost of total debt at the end of 2000
was 7.0%, compared to 6.5% at the end of last year. Debt to capitalization at
year end improved to 41.4%, from 47.2% last year, reflecting the reduction in
total debt discussed above. We anticipate generating excess cash in 2001 which
could be available to repay debt.
In 2000, we renewed the 364-day $300 million syndicated line of credit and
an additional $100 million credit line for 364 days, both of which supplement
our existing five-year, $500 million syndicated and committed revolving credit
facility. There were no borrowings outstanding under any of these facilities at
September 30, 2000. These facilities can be used to support our commercial paper
program, under which $478 million was outstanding at September 30, 2000, and for
other general corporate purposes. In addition, we have informal lines of credit
outside the United States. Our long-term debt rating at September 30, 2000 was
"A2" by Moody's and "A+" by Standard and Poor's. Our commercial paper rating at
September 30, 2000 was "P-1" by Moody's and "A-1" by Standard and Poor's. We
continue to have a high degree of confidence in our ability to refinance
maturing short-term and long-term debt, as well as to incur substantial
additional debt, if required.
Return on equity increased to 21.1% in 2000, from 16.3% in 1999.
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Other Matters
On January 1, 1999, eleven member countries of the European Union began the
transition to the euro as a common currency. Prior to the full implementation of
the new currency on January 1, 2002, there is a transition period during which
parties may use either their national currencies or the euro. We have completed
the necessary system modifications to accommodate euro-denominated transactions
with suppliers and customers. On October 1, 2000, we converted our accounting
systems from the national currencies to the euro. While adoption of a common
European currency has resulted in some changes in competitive practices, product
pricing and marketing strategies, it has not significantly changed our foreign
exchange market risk. Therefore, the euro conversion has not had a materially
adverse impact on our results of operations, financial condition or cash flows.
We believe that the fundamentally noncyclical nature of our core products,
our international diversification and our ability to meet the needs of the
worldwide healthcare industry for cost-effective and innovative products will
continue to cushion the long-term impact on BD of economic and political
dislocations in the countries in which we do business, including the effects of
possible healthcare system reforms. In 2000, inflation did not have a material
impact on our overall operations.
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Litigation
We, along with a number of other manufacturers, have been named as a defendant
in approximately 390 product liability lawsuits related to natural rubber latex
that have been filed in various state and Federal courts. Cases pending in
Federal court are being coordinated under the matter In re Latex Gloves Products
Liability Litigation (MDL Docket No. 1148) in Philadelphia, and analogous
procedures have been implemented in the state courts of California,
Pennsylvania, New Jersey and New York. Generally, these actions allege that
medical personnel have suffered allergic reactions ranging from skin irritation
to anaphylaxis as a result of exposure to medical gloves containing natural
rubber latex. In 1986, we acquired a business which manufactured, among other
things, latex surgical gloves. In 1995, we divested this glove business. We are
vigorously defending these lawsuits.
We, along with another manufacturer and several medical product
distributors, have been named as a defendant in eleven product liability
lawsuits relating to healthcare workers who allegedly sustained accidental
needlesticks, but have not become infected with any disease. The case brought in
California under the caption Chavez vs. Becton Dickinson (Case No. 722978, San
Diego County Superior Court), filed on August 4, 1998, was dismissed in a
judgment filed March 19, 1999. On August 29, 2000, the appellate court affirmed
the dismissal of the product liability claims, leaving only a pending statutory
claim for which the court has stated the plaintiff cannot recover damages. The
case brought in Florida under the caption Delgado vs. Becton Dickinson et al.
(Case No. 98-5608, Hillsborough County Circuit Court), filed on July 24, 1998,
was voluntarily withdrawn by the plaintiffs on March 8, 1999. Cases have been
filed on behalf of an unspecified number of healthcare workers in nine other
states, seeking class action certification under the laws of these states. To
date, no class has been certified in any of these cases. The nine remaining
actions are pending in state court in Texas, under the caption Usrey vs. Becton
Dickinson et al. (Case No. 342-173329-98, Tarrant County District Court), filed
on April 9, 1998; in Federal court in Ohio, under the caption Grant vs. Becton
Dickinson et al. (Case No. C2 98-844, Southern District of Ohio), filed on July
22, 1998; in state court in Illinois, under the caption McCaster vs. Becton
Dickinson et al. (Case No. 98L09478, Cook County Circuit Court), filed on August
13, 1998; in state court in Oklahoma, under the caption Palmer vs. Becton
Dickinson et al. (Case No. CJ-98-685, Sequoyah County District Court), filed on
October 27, 1998; in state court in Alabama, under the caption Daniels vs.
Becton Dickinson et al. (Case No. CV 1998 2757, Montgomery County Circuit
Court), filed on October 30, 1998; in state court in South Carolina, under the
caption Bales vs. Becton Dickinson et al. (Case No. 98-CP-40-4343, Richland
County Court of Common Pleas), filed on November 25, 1998; in state court in
Pennsylvania, under the caption Brown vs. Becton Dickinson et al. (Case No.
03474, Philadelphia County Court of Common Pleas), filed on November 27, 1998;
in state court in New Jersey, under the caption Pollak, Swartley vs. Becton
Dickinson et al. (Case No. L-9449-98, Camden County Superior Court), filed on
December 7, 1998; and in state court in New York, under the caption Benner vs.
Becton Dickinson et al. (Case No. 99-111372, Supreme Court of the State of New
York), filed on June 1, 1999. Generally, these remaining actions allege that
healthcare workers have sustained needlesticks using hollow-bore needle devices
manufactured by BD and, as a result, require medical testing, counseling and/or
treatment. Several actions additionally allege that the healthcare workers have
sustained mental anguish. Plaintiffs seek money damages in all remaining
actions.
In June 1999, a class certification hearing was held in the matter of Usrey
vs. Becton Dickinson et al., which first was filed in Texas state court on April
9, 1998, under the caption Calvin vs. Becton Dickinson et al. The Court has
advised the parties by letter received on October 27, 1999, that it believes it
is appropriate to address the issues in the case by way of a class action under
Texas procedural law. We have filed an interlocutory appeal from that ruling.
This appeal is currently pending.
We continue to oppose class action certification in these cases and will
continue vigorously to defend these lawsuits, including pursuing all appropriate
rights of appeal.
BD has insurance policies in place, and believes that a substantial portion
of defense costs and potential liability, if any, in the latex and class action
matters will be covered by insurance. In order to protect its rights to
coverage, we have filed an action for declaratory judgment under the caption
Becton Dickinson and Company vs. Adriatic Insurance Company et al. (Docket No.
MID-L-3649-99 MT, Middlesex County Superior Court) in New Jersey state court. We
have established reserves to cover reasonably anticipated defense costs in all
product liability lawsuits, including the needlestick class action and latex
matters.
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We, along with another manufacturer, a group purchasing organization
("GPO") and three hospitals, have been named as a defendant in an antitrust
action brought pursuant to the Texas Free Enterprise Act ("TFEA"). The action
is pending in state court in Texas, under the caption Retractable Technologies
Inc. vs. Becton Dickinson and Company et al. (Case No. 5333*JG98, Brazoria
County District Court), filed on August 4, 1998. Plaintiff, a manufacturer of
retractable syringes, alleges that our contracts with GPOs exclude plaintiff
from the market in syringes and blood collection products, in violation of the
TFEA. Plaintiff also alleges that we have conspired with other manufacturers to
maintain our market share in these products. Plaintiff seeks money damages.
This action is in preliminary stages. We intend to mount a vigorous defense in
this action.
We, along with another patent holder, have filed an action for patent
infringement under the caption Becton Dickinson and Company et al. vs. B. Braun
Medical, Inc. (Case No. 2:99-CV-00987J, United States District Court for the
District of Utah) on December 15, 1999. The defendant has filed a counterclaim
against us, and alleges, among other things, that our contacts with group
purchasing organizations exclude defendant from the market in IV catheters, in
violation of the Sherman, Clayton, and Lanham Acts. Defendant also alleges that
we have conspired with other manufacturers to maintain our market share in these
products. Defendant seeks money damages. The pending action is in preliminary
stages. We intend to prosecute our claim and vigorously defend against this
counterclaim.
In the patent infringement litigation under the caption Critikon, Inc. vs.
Becton Dickinson Vascular Access, Inc. (Civ. 93-108 (JJF), United States
District Court for the District of Delaware) the Court, on May 19, 2000, entered
judgment in favor of the plaintiff in the aggregate amount of $5.7 million,
excluding any potential interest charges. We have filed pending postjudgment
motions seeking recalculation of damages on the basis of perceived error in the
calculation of damages, in both amount and duration. We will continue to
vigorously defend this lawsuit. We have established reserves to cover
liabilities, if any, in this matter, based upon our best estimate within the
range of probable losses.
We also are involved in other legal proceedings and claims which arise in
the ordinary course of business, both as a plaintiff and a defendant.
While it is not possible to predict or determine the outcome of the patent,
product liability, antitrust or other legal actions brought against BD, upon
resolution of such matters, BD may incur charges in excess of presently
established reserves. While such future charges, individually and in the
aggregate, could have a material adverse impact on our net income and net cash
flows in the period in which they are recorded or paid, in our opinion, the
results of the above matters, individually and in the aggregate, are not
expected to have a material adverse effect on our consolidated financial
condition.
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Environmental Matters
We believe that our operations comply in all material respects with
applicable laws and regulations. We are a party to a number of Federal
proceedings in the United States brought under the Comprehensive Environment
Response, Compensation and Liability Act, also known as "Superfund," and similar
state laws. For all sites, there are other potentially responsible parties that
may be jointly or severally liable to pay all cleanup costs. We accrue costs for
estimated environmental liabilities based upon our best estimate within the
range of probable losses, without considering possible third-party recoveries.
Upon resolution of these proceedings, BD may incur charges in excess of
presently established accruals. While such future costs could have a material
adverse impact on our net income and net cash flows in the period in which they
are recorded or paid, in our opinion, the results of the above matters are not
expected to have a material adverse effect on our consolidated financial
condition.
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Adoption of New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which is required to be adopted in fiscal years
beginning after June 15, 2000. We will adopt the provisions of this Statement
effective October 1, 2000. This Statement requires that all derivatives be
recorded in the balance sheet as either an asset or liability measured at fair
value and that changes in fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. We began to purchase option contracts at the end of 2000
to mitigate foreign currency translation exposure. The cumulative effect of
adoption of this Statement will not be material to our results of operations or
financial condition.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB provides the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. We are required to
adopt the provisions of this SAB no later than our fourth quarter of fiscal
2001. The SEC issued additional guidance on this SAB in October 2000. We are in
the process of evaluating this additional guidance and have not yet determined
the future impact on our consolidated financial statements.
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Reorganization of Reporting Segments
In June 2000, we initiated a plan to change the structure of our internal
organization in a manner that, beginning October 1, 2000, will cause the
composition of our reportable segments to change. During the first quarter of
fiscal year 2001, execution of the planned changes will be finalized so that for
the quarter ending December 31, 2000, decisions about resource allocation and
performance assessment will be made separately for the reorganized Medical
Systems segment, the new Clinical Laboratory Solutions segment and the
reorganized Biosciences segment. As of December 31, 2000, financial reporting
for these three segments will be presented and the corresponding information for
earlier periods will be restated to reflect the new segment reporting structure.
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1999 Compared with 1998
Worldwide revenues in 1999 were $3.4 billion, an increase of 10% over 1998, with
acquisitions contributing 5%. The impact of foreign currency translation on
revenue growth was not significant. Underlying revenue growth, which excludes
the effects of foreign currency translation and acquisitions, resulted primarily
from volume increases in all segments. Medical revenues in 1999 increased 12%
over 1998 to $1.9 billion with acquisitions contributing 8%. Underlying revenue
growth was led by strong sales of pre-fillable syringes to pharmaceutical
companies and increased sales of infusion therapy products, particularly
advanced protection devices. Underperformance of home healthcare products
unfavorably affected revenue growth in 1999. Biosciences revenues in 1999
increased 7% over 1998 to $986 million with acquisitions contributing 2%.
Underlying revenue growth was led by market share gains in flow cytometry
products fueled by the continued introduction of innovative new products.
Infectious disease product revenues continued to be adversely affected by cost
containment in testing in the United States. Preanalytical revenues in 1999
increased 6% over 1998 to $509 million. Significant volume increases in advanced
protection devices were partially offset by cost containment pricing pressures
in several markets.
Gross profit margin was 49.9% in 1999, compared with 50.6% in 1998.
Excluding the impact of other charges relating to the exited product lines, as
discussed earlier, gross profit margin was 50.7% in 1999.
Selling and administrative expense of $932 million in 1999 was 27.3% of
revenues. Excluding reengineering and other charges relating to Genesis, as
discussed below, selling and administrative expense in 1999 was 26.8% of
revenues. The 1998 ratio was 27.6%, or 27.0% excluding reengineering charges for
Genesis. Savings achieved through spending controls and productivity
improvements offset increased investment relating to advanced protection
programs and the impact of acquisitions.
Investment in research and development in 1999 increased to $254 million,
or 7.4% of revenues, including the $49 million charge for purchased in-process
research and development related to 1999 acquisitions. In 1998, we recorded a
charge of $30 million for purchased in-process research and development
associated with an acquisition. Excluding the effect of purchased in-process
research and development in both years, investment in research and development
was 6% of revenues, or an increase of 9% over 1998. This increase included
additional funding directed toward the development of advanced protection
devices and new diagnostic platforms.
We recorded special charges of $76 million during 1999, as discussed
earlier. In 1998, we recorded special charges of $91 million, primarily
associated with the restructuring of certain manufacturing operations and the
write-down of impaired assets. The plan for restructuring our manufacturing
operations included the closure of a surgical blade plant in the United States,
scheduled for the first half of fiscal year 2002. We also recorded $22 million
of charges in 1998 associated with the reengineering component of Genesis. The
majority of these charges were included in selling and administrative expense.
Operating income in 1999 was $445 million, compared to $405 million in
1998. Excluding the impact of special and other charges and purchased in-process
research and development charges, operating income would have been 17.4% of
revenues in 1999. Operating income of $405 million in 1998 also included certain
charges, as discussed above.
Net interest expense of $72 million in 1999 was $16 million higher than in
1998, primarily due to additional borrowings to fund acquisitions.
"Other (expense) income, net" in 1999 was $1 million of net expense,
compared to $8 million of net expense in 1998, primarily due to lower foreign
exchange losses, gains on the sale of assets, as well as settlements in 1999.
The effective tax rate in 1999 was 26.0%, compared to 30.6% in 1998. The
decrease is principally due to a $7 million favorable tax judgment in Brazil and
a favorable mix in income among tax jurisdictions, partially offset by the lack
of a tax benefit associated with a larger purchased in-process research and
development charge recorded in 1999 as compared to 1998.
Net income in 1999 was $276 million, compared to $237 million in 1998.
Diluted earnings per share in 1999 were $1.04, compared to $.90 in 1998.
Excluding the special and other charges and purchased in-process research and
development charges, diluted earnings per share in 1999 were $1.49. Diluted
earnings per share of $.90 in 1998 also included certain charges, as discussed
above.
Capital expenditures were $312 million, compared to $181 million in 1998,
reflecting additional spending for capacity expansion for advanced protection
devices. Medical, Biosciences and Preanalytical capital spending totaled $188
million, $42 million and $54 million, respectively, in 1999.
Net cash provided by financing activities was $365 million during 1999, as
compared to $242 million during 1998. This change was primarily due to the
elimination of common share repurchases and to increased issuance of commercial
paper in 1999, compared with 1998, offset by the repayment of long-term debt.
During 1999, total debt increased $435 million, primarily as a result of
increased spending on acquisitions. Short-term debt was 40% of total debt at
year end, compared to
25
Financial Review Becton, Dickinson and Company
33% at the end of 1998. The change in this percentage was principally
attributable to the use of short-term debt to finance a portion of our
acquisition activities. In September 1999, we issued to the public $200 million
of 10-year 7.15% notes at an effective yield of 7.34%. We utilized the proceeds
to repay commercial paper.
Return on equity increased to 16.3% in 1999, from 15.8% in 1998.
- --------------------------------------------------------------------------------
Cautionary Statement Pursuant to Private Securities Litigation
Reform Act of 1995-"Safe Harbor" for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of BD. BD and its
representatives may from time to time make certain forward-looking statements in
publicly-released materials, both written and oral, including statements
contained in this report and filings with the SEC and in our other reports to
shareholders. Forward-looking statements may be identified by the use of words
like "plan," "expect," "believe," "intend," "will," "anticipate," "estimate" and
other words of similar meaning in conjunction with, among other things,
discussions of future operations and financial performance, as well as our
strategy for growth, product development, regulatory approvals, market position
and expenditures. All statements which address operating performance or events
or developments that we expect or anticipate will occur in the future-including
statements relating to volume growth, sales and earnings per share growth and
statements expressing views about future operating results-are forward-looking
statements within the meaning of the Act.
Forward-looking statements are based on current expectations of future
events. The forward-looking statements are and will be based on management's
then current views and assumptions regarding future events and operating
performance, and speak only as of their dates. Investors should realize that if
underlying assumptions prove inaccurate or unknown risks or uncertainties
materialize, actual results could vary materially from our expectations and
projections. Investors are therefore cautioned not to place undue reliance on
any forward-looking statements. Furthermore, we undertake no obligation to
update or revise any forward-looking statements whether as a result of new
information, future events and developments or otherwise.
The following are some important factors that could cause our actual
results to differ from our expectations in any forward-looking statements:
o Regional, national and foreign economic factors, including inflation and
fluctuations in interest rates and foreign currency exchange rates and the
potential effect of such fluctuations on revenues, expenses and resulting
margins.
o Competitive product and pricing pressures and our ability to gain or
maintain market share in the global market as a result of actions by
competitors, including technological advances achieved and patents attained
by competitors as patents on our products expire. While we believe our
opportunities for sustained, profitable growth are considerable, actions of
competitors could impact our earnings, share of sales and volume growth.
o Changes in domestic and foreign healthcare resulting in pricing pressures,
including the continued consolidation among healthcare providers, trends
toward managed care and healthcare cost containment, and government laws
and regulations relating to sales and promotion, reimbursement and pricing
generally.
o Fluctuations in the cost and availability of raw materials and the ability
to maintain favorable supplier arrangements and relationships.
o Government laws and regulations affecting domestic and foreign operations,
including those relating to trade, monetary and fiscal policies, taxation,
environmental matters, price controls, licensing and regulatory approval of
new products.
o Difficulties inherent in product development, including the potential
inability to successfully continue technological innovation, complete
clinical trials, obtain regulatory approvals in the United States and
abroad, or gain and maintain market approval of products, and the
possibility of encountering infringement claims by competitors with respect
to patent or other intellectual property rights, all of which can preclude
or delay commercialization of a product.
o Significant litigation adverse to BD, including product liability claims,
patent infringement claims, and antitrust claims, as well as other risks
and uncertainties detailed from time to time in our SEC filings.
o Our ability to achieve earnings forecasts, which are generated based on
projected volumes and sales of many product types, some of which are more
profitable than others. There can be no assurance that we will achieve a
projected level or mix of product sales.
o Product efficacy or safety concerns resulting in product recalls,
regulatory action on the part of the Federal Drug Administration (or
foreign counterparts) or declining sales.
o Economic and political conditions in international markets, including civil
unrest, governmental changes and restrictions on the ability to transfer
capital across borders.
o Our ability to penetrate developing and emerging markets, which also
depends on economic and political conditions, and how well we are able to
acquire or form strategic business alliances with local companies and make
necessary infrastructure enhancements to production facilities,
distribution networks, sales equipment and technology.
o The impact of business combinations, including acquisitions and
divestitures, both internally for BD and externally in the healthcare
industry.
o Issuance of new or revised accounting standards by the American Institute
of Certified Public Accountants, the FASB or the SEC.
The foregoing list sets forth many, but not all, of the factors that could
impact our ability to achieve results described in any forward-looking
statements. Investors should understand that it is not possible to predict or
identify all such factors and should not consider this list to be a complete
statement of all potential risks and uncertainties.
26
Becton, Dickinson and Company
Report of Management
The following consolidated financial statements have been prepared by management
in conformity with accounting principles generally accepted in the United States
and include, where required, amounts based on the best estimates and judgments
of management. The integrity and objectivity of data in the financial statements
and elsewhere in this Annual Report are the responsibility of management.
In fulfilling its responsibilities for the integrity of the data presented
and to safeguard the Company's assets, management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company's assets are protected and that transactions are
appropriately authorized, recorded and summarized. This system of control is
supported by the selection of qualified personnel, by organizational assignments
that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of written policies and procedures.
This control structure is further reinforced by a program of internal audits,
including a policy that requires responsive action by management.
The consolidated financial statements have been audited by Ernst & Young
LLP, independent auditors, whose report follows. Their audits were conducted in
accordance with auditing standards generally accepted in the United States and
included a review and evaluation of the Company's internal accounting controls
to the extent they considered necessary for the purpose of expressing an opinion
on the consolidated financial statements. This, together with other audit
procedures and tests, was sufficient to provide reasonable assurance as to the
fairness of the information included in the consolidated financial statements
and to support their opinion thereon.
The Board of Directors monitors the internal control system, including
internal accounting controls, through its Audit Committee which consists of four
outside Directors. The Audit Committee meets periodically with the independent
auditors, internal auditors and financial management to review the work of each
and to satisfy itself that they are properly discharging their responsibilities.
The independent auditors and internal auditors have full and free access to the
Audit Committee and meet with its members, with and without financial management
present, to discuss the scope and results of their audits including internal
control, auditing and financial reporting matters.
/s/ Edward J. Ludwig /s/ John R. Considine /s/ Richard M. Hyne
Edward J. Ludwig John R. Considine Richard M. Hyne
President and Chief Executive Vice President Vice President and
Executive Officer and Chief Financial Controller
Officer
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
Becton, Dickinson and Company
We have audited the accompanying consolidated balance sheets of Becton,
Dickinson and Company as of September 30, 2000 and 1999, and the related
consolidated statements of income, comprehensive income, and cash flows for each
of the three years in the period ended September 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Becton,
Dickinson and Company at September 30, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
November 7, 2000
27
Becton, Dickinson and Company
Financial Statements
- --------------------------------------------------------------------------------
Consolidated Statements of Income
Years Ended September 30
Thousands of dollars, except per-share amounts
See notes to consolidated financial statements
28
Becton, Dickinson and Company
- --------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
Years Ended September 30
Thousands of dollars
See notes to consolidated financial statements
29
Statements Becton, Dickinson and Company
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
September 30
Thousands of dollars, except per-share amounts
See notes to consolidated financial statements
30
Becton, Dickinson and Company
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Years Ended September 30
Thousands of dollars
See notes to consolidated financial statements
31
Becton, Dickinson and Company
Notes to Consolidated
Financial Statements
Thousands of dollars, except per-share amounts
Index
Note Subject Page
1 Summary of Significant Accounting Policies 32
2 Acquisitions 33
3 Employee Stock Ownership Plan/Savings
Incentive Plan 34
4 Benefit Plans 34
5 Special and Other Charges 36
6 Gains on Investments, Net 38
7 Other Income (Expense), Net 38
8 Income Taxes 38
9 Supplemental Balance Sheet Information 39
10 Debt 40
11 Financial Instruments 41
12 Shareholders' Equity 42
13 Comprehensive Income 43
14 Commitments and Contingencies 43
15 Stock Plans 45
16 Earnings Per Share 46
17 Segment Data 47
1
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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 after the elimination of
intercompany transactions.
Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which approximates
market. The Company considers all highly liquid investments with a maturity of
90 days or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The Company uses the
last-in, first-out ("LIFO") method of determining cost for substantially all
inventories in the United States. All other inventories are accounted for using
the first-in, first-out ("FIFO") method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are principally provided on the
straight-line basis over estimated useful lives which range from 20 to 45 years
for buildings, four to 10 years for machinery and equipment, and three to 20
years for leasehold improvements. Depreciation expense was $168,846, $158,202,
and $149,957 in fiscal 2000, 1999, and 1998, respectively.
Intangibles
Goodwill and core and developed technology arise from acquisitions. Goodwill is
amortized over periods principally ranging from 10 to 40 years, using the
straight-line method. Core and developed technology is amortized over periods
ranging from 15 to 20 years, using the straight-line method. Other intangibles,
which include patents, are amortized over periods principally ranging from three
to 40 years, using the straight-line method. Intangibles are periodically
reviewed to assess recoverability from future operations using undiscounted
cash flows. To the extent carrying values exceed fair values, an impairment loss
is recognized in operating results.
Revenue Recognition
Substantially all revenue is recognized when products are shipped to customers.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB provides the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. The Company is
required to adopt the provisions of this SAB no later than its fourth quarter of
fiscal 2001. The SEC issued additional guidance on this SAB in October 2000. The
Company is in the process of evaluating this additional guidance and has not yet
determined the future impact on its consolidated financial statements.
Warranty
Estimated future warranty obligations related to applicable products are
provided by charges to operations in the period in which the related revenue is
recognized.
Income Taxes
United States income taxes are not provided on substantially all undistributed
earnings of foreign and Puerto Rican subsidiaries since the subsidiaries
reinvest such earnings or remit them to the Company without tax consequence.
Income taxes are provided and tax credits are recognized based on tax laws
enacted at the dates of the financial statements.
Earnings Per Share
Basic earnings per share are computed based on the weighted average number of
common shares outstanding. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
32
Becton, Dickinson and Company
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates or assumptions affect reported assets, liabilities, revenues and
expenses as reflected in the financial statements. Actual results could differ
from these estimates.
Derivative Financial Instruments
Derivative financial instruments are utilized by the Company in the management
of its foreign currency and interest rate exposures. The Company does not use
derivative financial instruments for trading or speculative purposes.
The Company hedges its foreign currency exposures by entering into
offsetting forward exchange contracts and currency options, when it deems
appropriate. The Company also occasionally enters into interest rate swaps,
interest rate caps, interest rate collars, and forward rate agreements in order
to reduce the impact of fluctuating interest rates on its short-term debt and
investments. In connection with issuances of long-term debt, the Company may
also enter into forward rate agreements in order to protect itself from
fluctuating interest rates during the period in which the sale of the debt is
being arranged. The Company also occasionally enters into forward contracts in
order to reduce the impact of fluctuating market values on its
available-for-sale securities as defined by Statement of Financial Accounting
Standards ("SFAS") No. 115.
At the end of fiscal 2000, the Company began to purchase option contracts
to hedge anticipated sales from the United States to foreign customers. The
contracts are designated and effective as hedges of those future transactions.
The Company accounts for derivative financial instruments using the
deferral method of accounting when such instruments are intended to hedge
identifiable firm foreign currency commitments or anticipated transactions and
are designated as, and effective as, hedges. Foreign exchange exposures arising
from certain receivables, payables, and short-term borrowings that do not meet
the criteria for the deferral method are marked to market. Resulting gains and
losses are recognized currently in Other income (expense), net, largely
offsetting the respective losses and gains recognized on the underlying
exposures.
The Company designates its interest rate hedge agreements as hedges of the
underlying debt. Interest expense on the debt is adjusted to include the
payments made or received under such hedge agreements.
Any deferred gains or losses associated with derivative instruments, which
on infrequent occasions may be terminated prior to maturity, are recognized in
income in the period in which the underlying hedged transaction is recognized.
In the event a designated hedged item is sold, extinguished or matures prior to
the termination of the related derivative instrument, such instrument would be
closed and the resultant gain or loss would be recognized in income.
Stock-Based Compensation
Under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for stock-based employee compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the exercise price.
2
- --------------------------------------------------------------------------------
Acquisitions
During fiscal year 1999, the Company acquired 10 businesses for an aggregate of
$381,530 and 357,522 shares of the Company's stock. The Company also granted
options to purchase 73,074 shares of the Company's common stock to eligible
employees of one of the acquired companies. The 1999 results of operations
included charges of $48,800 for purchased in-process research and development in
connection with three of these acquisitions. Included in 1999 acquisitions is
the purchase of Clontech Laboratories, Inc. ("Clontech"), for approximately
$201,000 in cash. In connection with this acquisition, a charge of $32,000 for
purchased in-process research and development was included in the results of
operations for the Biosciences segment. Intangibles related to Clontech are
being amortized on a straight-line basis over their useful lives, which range
from 10 to 15 years. Unaudited pro forma consolidated results, after giving
effect to the businesses acquired during fiscal 1999, would not have been
materially different from the reported amounts for either 1999 or 1998.
During fiscal year 1998, the Company acquired six businesses for an
aggregate of $545,603 in cash and 595,520 shares of the Company's common stock,
or 297,760 shares on a pre-split basis. Included in 1998 acquisitions is the
purchase of the Medical Devices Division ("MDD") of The BOC Group for
approximately $457,000 in cash. In connection with this acquisition, a charge of
$30,000 for purchased in-process research and development was included in the
1998 results of operations. Intangibles related to MDD are being amortized on a
straight-line basis over their useful lives, which range from 15 to 25 years.
The assumed liabilities for the MDD acquisition included approximately $14,300
for severance and exit costs associated with the integration of certain MDD
administrative functions. These liabilities were fully paid by the second
quarter of fiscal 2000.
33
Notes Becton, Dickinson and Company
The following unaudited pro forma data summarizes the results of operations
for the year ended September 30, 1998 as if the MDD acquisition had been
completed as of the beginning of the period. The pro forma data give effect to
actual operating results prior to the acquisition, adjusted to include the pro
forma effect of interest expense, amortization of intangibles, income taxes and
the charge for purchased in-process research and development noted earlier.
These pro forma amounts do not purport to be indicative of the results that
would have actually been obtained if the acquisition occurred as of the
beginning of the period presented or that may be obtained in the future.
Unaudited pro forma consolidated revenues, net income, basic earnings per
share, and diluted earnings per share would have been $3,206,837, $227,664,
$.91, and $.86 for fiscal 1998, respectively.
In connection with the acquisition of Difco Laboratories Incorporated in
1997, the Company assumed liabilities for severance and other exit costs
associated with the closing of certain facilities of approximately $17,500,
which were paid as of September 30, 2000.
All acquisitions were recorded under the purchase method of accounting and,
therefore, the purchase prices have been allocated to assets acquired and
liabilities assumed based on estimated fair values. The results of operations of
the acquired companies were included in the consolidated results of the Company
from their respective acquisition dates. In-process research and development
charges represent the fair value of certain acquired research and development
projects that were determined to have not reached technological feasibility and
do not have alternative future uses.
3
- --------------------------------------------------------------------------------
Employee Stock Ownership Plan/Savings Incentive Plan
The Company has an Employee Stock Ownership Plan ("ESOP") as part of its
voluntary defined contribution plan (Savings Incentive Plan) covering most
domestic employees. The ESOP is intended to satisfy all or part of the Company's
obligation to match 50% of employees' contributions, up to a maximum of 3% of
each participant's salary. To accomplish this, in 1990, the ESOP borrowed
$60,000 in a private debt offering and used the proceeds to buy the Company's
ESOP convertible preferred stock. Each share of preferred stock has a guaranteed
liquidation value of $59 per share and is convertible into 6.4 shares of the
Company's common stock. The preferred stock pays an annual dividend of $3.835
per share, a portion of which is used by the ESOP, together with the Company's
contributions, to repay the ESOP debt. Since the ESOP debt is guaranteed by the
Company, it is reflected on the consolidated balance sheet as short-term and
long-term debt with a related amount shown in the shareholders' equity section
as Unearned ESOP compensation.
The amount of ESOP expense recognized is equal to the cost of the preferred
shares allocated to plan participants and the ESOP interest expense for the
year, reduced by the amount of dividends paid on the preferred stock.
For the plan year ended June 30, 1999, preferred shares accumulated in the
trust in excess of the Company's matching obligation due to the favorable
performance of the Company's common stock in previous years. As a result, the
Company matched up to an additional 1% of each eligible participant's salary.
This increase in the Company's contribution was distributed in September 1999.
Selected financial data pertaining to the ESOP/Savings Incentive Plan
follow:
2000 1999 1998
- --------------------------------------------------------------------------------
Total expense of the
Savings Incentive Plan $ 3,442 $ 3,851 $ 4,183
Compensation expense
(included in total expense above) $ 2,017 $ 1,845 $ 1,975
Dividends on ESOP shares used
for debt service $ 2,916 $ 3,114 $ 3,235
Number of preferred shares
allocated at September 30 441,530 411,727 373,884
=======================================
The Company guarantees employees' contributions to the fixed income fund of
the Savings Incentive Plan. The amount guaranteed was $88,826 at September 30,
2000.
4
- --------------------------------------------------------------------------------
Benefit Plans
The Company has defined benefit pension plans covering substantially all of its
employees in the United States and certain foreign locations. The Company also
provides certain postretirement healthcare and life insurance benefits to
qualifying domestic retirees. Postretirement benefit plans in foreign countries
are not material.
In September 2000, the Compensation and Benefits Committee of the Company's
Board of Directors rescinded its January 1999 approval for design changes to the
U.S. pension plan to reflect a pension equity formula. The U.S. pension plan had
been remeasured as of January 31, 1999, and the net periodic pension cost in
1999 and the benefit obligations at September 30, 1999 reflected the approval of
this change. As a result of the September 2000 rescission, the U.S. pension plan
benefit obligations at September 30, 2000 reflect the previous "final average
pay" plan.
34
Becton, Dickinson and Company
The change in benefit obligation, change in plan assets, funded status and
amounts recognized in the consolidated balance sheets at September 30, 2000 and
1999 for these plans were as follows:
Foreign pension plan assets at fair value included in the preceding table
were $131,938 and $124,099 at September 30, 2000 and 1999, respectively. The
foreign pension plan projected benefit obligations were $137,360 and $137,836 at
September 30, 2000 and 1999, respectively.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $38,960, $33,169 and $18,539, respectively as of
September 30, 2000, and $48,635, $39,809 and $20,519, respectively as of
September 30, 1999.
Net pension and postretirement expense included the following components:
35
Notes Becton, Dickinson and Company
Net pension expense attributable to foreign plans included in the preceding
table was $8,580, $8,721 and $4,902 in 2000, 1999 and 1998, respectively.
As discussed in Note 5, the Company recorded special charges in 1999
relating to an enhanced voluntary retirement incentive program. These charges
included $7,828 and $5,412 of special termination benefits relating to pension
benefits and postretirement benefits, respectively.
The assumptions used in determining benefit obligations were as follows:
Healthcare cost trends of 9% pre-age 65 and 6% post-age 65 were assumed in
the valuation of postretirement healthcare benefits at both September 30, 2000
and 1999. These rates were assumed to decrease to an ultimate rate of 6%
beginning in 2003 for pre-age 65 and 2001 for post-age 65. A one percentage
point increase in healthcare cost trend rates in each year would increase the
accumulated postretirement benefit obligation as of September 30, 2000 by
$10,180 and the aggregate of the service cost and interest cost components of
2000 annual expense by $789. A one percentage point decrease in the healthcare
cost trend rates in each year would decrease the accumulated postretirement
benefit obligation as of September 30, 2000 by $8,647 and the aggregate of the
2000 service cost and interest cost by $671.
The Company utilizes a service-based approach in applying the provisions of
SFAS No. 112, "Employers' Accounting For Postemployment Benefits," for most of
its postemployment benefits. Such an approach recognizes that actuarial gains
and losses may result from experience that differs from baseline assumptions.
Postemployment benefit costs were $22,364, $22,842, and $24,015 in 2000, 1999
and 1998, respectively.
5
- --------------------------------------------------------------------------------
Special and Other Charges
During the fourth quarter of 2000, the Company recorded special charges of
$57,514. Of these charges, $31,700 related to severance costs associated with a
worldwide organizational restructuring which will result in the termination of
approximately 600 employees from various functions worldwide. The Company
expects the majority of these terminations to occur within the first half of the
coming year and the remainder by the end of fiscal 2001. Special charges in 2000
also included $5,800 for the write-down of impaired fixed assets held for sale
in the BD Medical Systems segment and other exit costs related to this
restructuring program, as well as $20,000 for estimated litigation defense costs
associated with the Company's divested latex glove business.
The Company also recorded $13,100 of charges in Cost of products sold in
the second quarter of fiscal 2000, associated with a product recall. These
charges consisted primarily of costs associated with product returns, disposal
of affected product, and other direct recall costs.
The Company recorded special charges in fiscal years 1999 and 1998
associated with restructuring programs, primarily designed to improve the
Company's cost structure, refocus certain businesses, and write down impaired
assets.
During 1999, the Company recorded special charges of $75,553. Of these
charges, $46,125 were associated with the write-off of intangibles, as well as
other costs relating to the Company's decision to exit certain product lines,
primarily in the area of home healthcare within the BD Medical Systems segment.
The Company completed its implementation of the exit plans in 1999. The Company
also reversed $6,300 of 1998 special charges in 1999 as a result of the decision
not to exit certain activities as had originally been planned.
Fiscal 1999 special charges also included $17,857, primarily for the
write-down of certain investment assets related to various product development
ventures, primarily in the BD Medical Systems segment, that the Company will no
longer pursue. The Company's decision to refocus certain businesses and the
continued decline in sales volume for selected products indicated impairment,
which required a reassessment of the recoverability of the underlying assets. An
impairment loss was recorded as a result of the carrying amounts of these assets
exceeding their recoverable values, based on discounted future cash flow
estimates.
36
Becton, Dickinson and Company
Special charges in 1999 also included $17,871 in special termination and
severance benefits associated with an enhanced retirement incentive program.
This program was offered to 176 employees meeting certain age and service
requirements at selected locations. The related expenses for separation pay and
enhanced pension and retirement benefits were recorded to special charges upon
acceptance by 133 participants.
The Company also recorded $26,868 of charges in Cost of products sold in
1999, to reflect the write-off of inventories and to provide appropriate
reserves for expected future returns relating to the exited product lines
discussed earlier.
During 1998, the Company recorded special charges of $90,945, primarily
associated with the restructuring of certain manufacturing operations and the
write-down of impaired assets. The restructuring plan included approximately
$35,000 in special charges related primarily to severance and other termination
costs and losses from the disposal of assets. As discussed earlier, the Company
reversed $6,300 of these charges in 1999 as a result of the decision not to exit
certain activities as had originally been planned. As of September 30, 2000,
approximately 100 employees were terminated, and the Company expects that an
additional 150 people will be affected by this plan, upon the closure of a
surgical blade plant in the United States, scheduled for the first half of
fiscal year 2002. The remaining 1998 restructuring accruals related to this
closure consist primarily of severance.
The write-down of assets in 1998 included approximately $38,000 in special
charges to recognize an impairment loss related primarily to goodwill associated
with prior acquisitions in the BD Biosciences segment. The sustained decline in
sales volume of manual microbiology products within this segment, combined with
the Company's increased focus on new and developing alternative technologies,
created an impairment indicator that required a reassessment of recoverability.
An impairment loss was recorded as a result of the carrying value of these
assets exceeding their fair value, calculated on the basis of discounted
estimated future cash flows. The remaining special charges of approximately
$18,000 consisted of various other one-time charges.
A summary of the activity for the accruals and other components of special
charges follows:
(A) Includes reversals of 1998 special charges of $1,500 for severance and
$4,800 for asset write downs.
The Company also recorded $22,000 of charges in 1998 associated with the
reengineering of business processes relating to the enterprise-wide program to
upgrade its business systems. The majority of these charges were included in
Selling and administrative expense.
37
Notes Becton, Dickinson and Company
6
- --------------------------------------------------------------------------------
Gains on Investments, Net
Gains on investments, net in 2000 related primarily to transactions involving
two equity investments.
The Company sold portions of an investment in the second and fourth
quarters for net gains of $33,159 and $11,349 before taxes, respectively. The
proceeds from these sales were $37,992 and $14,514, respectively. The cost of
this investment was determined based upon the specific identification method.
The Company had entered into a forward sale contract to hedge the proceeds from
the anticipated sale in the fourth quarter.
During the third quarter, the Company received 480,000 shares of common
stock in a publicly traded company (parent) in exchange for its shares in a
majority-owned subsidiary of the parent company. The total value of the stock
received by the Company was $50,820. Based upon the fair value of the parent
common stock at the date of the exchange and the cost basis of subsidiary stock,
the Company recorded a gain upon the exchange of the shares. The Company also
entered into forward sale contracts to hedge the proceeds from the anticipated
sale of the parent common stock. During the third quarter, the Company sold the
parent common stock and settled the forward sale contracts. As a result of these
transactions, the Company recorded a net gain of $28,810 before taxes.
7
- --------------------------------------------------------------------------------
Other Income (Expense), Net
Other income, net in 2000 included income of $7,089 associated with settlements
and a $2,517 gain on an investment hedge. Also included in Other income, net
were foreign exchange losses of $5,849, including hedging costs, and a net loss
of $2,735 relating to assets held for sale.
Other (expense), net in 1999 included foreign exchange losses of $9,154,
including hedging costs. Other (expense), net also included $2,654 of gains on
the sale of assets and income of $2,610 associated with settlements.
Other (expense), net in 1998 included foreign exchange losses of $11,038,
including hedging costs, and a gain of $2,909 on the sale of an asset.
8
- --------------------------------------------------------------------------------
Income Taxes
The provision for income taxes is composed of the following charges (benefits):
2000 1999 1998
- ----------------------------------------------------------------------------
Current:
Domestic:
Federal $ 20,201 $ 27,303 $ 67,740
State and local, including
Puerto Rico 13,843 12,127 35,078
Foreign 55,747 52,931 33,812
-----------------------------------------
89,791 92,361 136,630
-----------------------------------------
Deferred:
Domestic 35,029 15,138 (30,349)
Foreign 2,217 (10,563) (1,983)
-----------------------------------------
37,246 4,575 (32,332)
-----------------------------------------
$ 127,037 $ 96,936 $ 104,298
=========================================
In accordance with SFAS No. 109, "Accounting for Income Taxes," deferred
tax assets and liabilities are netted on the balance sheet by separate tax
jurisdictions. At September 30, 2000 and 1999, net current deferred tax assets
of $65,731 and $60,119, respectively, were included in Prepaid expenses,
deferred taxes and other. Net non-current deferred tax assets of $917 and
$3,890, respectively, were included in Other non-current assets. Net current
deferred tax liabilities of $991 and $1,067, respectively, were included in
Current Liabilities-Income taxes. Net non-current deferred tax liabilities of
$51,117 and $4,003, respectively, were included in Deferred Income Taxes and
Other. Deferred taxes are not provided on substantially all undistributed
earnings of foreign and Puerto Rican subsidiaries. At September 30, 2000, the
cumulative amount of such undistributed earnings approximated $1,335,000 against
which United States tax-free liquidation provisions or substantial tax credits
are available. Determining the tax liability that would arise if these earnings
were remitted is not practicable.
Deferred income taxes at September 30 consisted of:
38
Becton, Dickinson and Company
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate follows:
2000 1999 1998
- ---------------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal tax benefit .9 .4 .1
Effect of foreign and Puerto Rican
income and foreign tax credits (8.7) (10.8) (6.1)
Research tax credit (1.6) (2.5) (1.6)
Purchased in-process research
and development .3 4.6 3.1
Adjustments to estimated liability
for prior years' taxes (2.0) -- --
Other, net .5 (.7) .1
------------------------------
24.4% 26.0% 30.6%
==============================
The approximate dollar and diluted per-share amounts of tax reductions
related to tax holidays in various countries in which the Company does business
were: 2000-$40,500 and $.15; 1999-$30,400 and $.11; and 1998-$18,000 and $.07.
The tax holidays expire at various dates through 2018.
The Company made income tax payments, net of refunds, of $51,010 in 2000,
$80,334 in 1999, and $117,321 in 1998.
The components of Income Before Income Taxes follow:
2000 1999 1998
- -------------------------------------------------------------------------
Domestic, including Puerto Rico $285,228 $177,520 $238,109
Foreign 234,706 195,135 102,757
------------------------------------
$519,934 $372,655 $340,866
====================================
9
- --------------------------------------------------------------------------------
Supplemental Balance Sheet Information
Trade Receivables
Allowances for doubtful accounts and cash discounts netted against trade
receivables were $43,642 and $49,036 at September 30, 2000 and 1999,
respectively.
Inventories 2000 1999
- ---------------------------------------------
Materials $156,918 $160,332
Work in process 110,843 94,627
Finished products 410,915 387,574
----------------------
$678,676 $642,533
======================
Inventories valued under the LIFO method were $437,254 in 2000 and $354,071
in 1999. Inventories valued under the LIFO method would have been higher by
approximately $9,500 in 2000 and $17,000 in 1999, if valued on a current
cost basis.
Property, Plant and Equipment 2000 1999
- -----------------------------------------------------------------
Land $ 61,550 $ 64,497
Buildings 960,889 938,859
Machinery, equipment and fixtures 2,094,178 1,888,169
Leasehold improvements 46,483 41,279
--------------------------
3,163,100 2,932,804
Less allowances for depreciation
and amortization 1,587,042 1,501,655
--------------------------
$1,576,058 $1,431,149
==========================
Goodwill 2000 1999
- -----------------------------------------------------------------
Goodwill $ 599,850 $ 636,362
Less accumulated amortization 133,507 109,420
--------------------------
$ 466,343 $ 526,942
==========================
Core and Developed Technology 2000 1999
- -----------------------------------------------------------------
Core and developed technology $ 353,207 $ 353,207
Less accumulated amortization 44,146 23,747
--------------------------
$ 309,061 $ 329,460
==========================
Other Intangibles 2000 1999
- -----------------------------------------------------------------
Patents and other $ 351,250 $ 337,871
Less accumulated amortization 178,530 159,586
--------------------------
$ 172,720 $ 178,285
==========================
39
Notes Becton, Dickinson and Company
10
- --------------------------------------------------------------------------------
Debt
The components of Short-term debt follow:
2000 1999
- -------------------------------------------------------------
Loans payable:
Domestic $478,236 $572,810
Foreign 50,662 51,289
Current portion of long-term debt 108,837 7,155
----------------------
$637,735 $631,254
======================
Domestic loans payable consist of commercial paper. Foreign loans payable
consist of short-term borrowings from financial institutions. The weighted
average interest rates for loans payable were 6.5% and 5.3% at September 30,
2000 and 1999, respectively. The Company has available committed credit
facilities of $100,000 expiring in March 2001, $300,000 expiring in August 2001
and $ 500,000 expiring in November 2001. All of these facilities support the
Company's commercial paper borrowing program and can also be used for other
general corporate purposes. Restrictive covenants under these agreements include
a minimum interest coverage ratio. There were no borrowings outstanding under
these facilities at September 30, 2000. In addition, the Company had unused
short-term foreign lines of credit pursuant to informal arrangements of
approximately $202,000 and $243,000 at September 30, 2000 and 1999,
respectively.
The components of Long-Term Debt follow:
2000 1999
- -------------------------------------------------------------------
Domestic notes due through 2015
(average year-end interest rate:
5.7%-2000; 5.5%-1999) $ 16,674 $ 16,596
Foreign notes due through 2011
(average year-end interest rate:
4.7%-2000; 4.6%-1999) 10,580 14,435
8.80% Notes due March 1, 2001 -- 100,000
9.45% Guaranteed ESOP Notes due through
July 1, 2004 17,265 23,138
6.90% Notes due October 1, 2006 100,000 100,000
7.15% Notes due October 1, 2009 200,000 200,000
8.70% Debentures due January 15, 2025 100,000 100,000
7.00% Debentures due August 1, 2027 168,000 200,000
6.70% Debentures due August 1, 2028 167,050 200,000
----------------------
$779,569 $954,169
======================
In September 1999, the Company issued $200,000 of 7.15% notes due on
October 1, 2009. The effective yield of the notes including the results of an
interest rate hedge and other financing costs was 7.34%.
The Company has available $100,000 under a $500,000 shelf registration
statement filed in October 1997 for the issuance of debt securities.
The aggregate annual maturities of long-term debt during the fiscal years
ending September 30, 2002 to 2005 are as follows: 2002-$8,838; 2003-$8,981;
2004-$5,553; 2005-$956.
The Company capitalizes interest costs as a component of the cost of
construction in progress. The following is a summary of interest costs:
2000 1999 1998
- ---------------------------------------------------------------
Charged to operations $ 86,511 $ 76,738 $ 65,584
Capitalized 24,946 14,655 10,011
------------------------------------
$111,457 $ 91,393 $ 75,595
====================================
Interest paid, net of amounts capitalized, was $78,272 in 2000, $77,681 in
1999 and $64,160 in 1998.
40
Becton, Dickinson and Company
11
- --------------------------------------------------------------------------------
Financial Instruments
Fair Value of Financial Instruments
Cash equivalents, short-term investments and short-term debt are carried at
cost, which approximates fair value. Other investments are classified as
available-for-sale securities. Fair values were estimsted based on market
prices, where available, or dealer quotes. The fair value of certain long-term
debt is based on redemption value.
The estimated fair values of the Company's financial instruments at September
30, 2000 and 1999 were as follows:
2000 1999
- -----------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-----------------------------------------
Other investments
(non-current)(A) $ 9,125 $ 8,582 $ 15,413 $ 10,534
Currency options(B) 9,785 9,797 106 65
Forward exchange
contracts(B) 1,438 730 148 158
Long-term debt 779,569 737,225 954,169 928,809
=========================================
(A) Included in Other non-current assets.
(B) Included in Prepaid expenses, deferred taxes and other.
Off-Balance Sheet Risk
The Company has certain receivables, payables and short-term borrowings
denominated in currencies other than the functional currency of the Company and
its subsidiaries. During the year, the Company hedged substantially all of these
exposures by entering into forward exchange contracts and currency options. The
Company's foreign currency risk exposure is primarily in Western Europe, Asia
Pacific, Japan, Brazil and Mexico.
On September 29, 2000, the Company began to purchase option contracts to
hedge anticipated sales from the United States to foreign customers, primarily
in Western Europe and Japan.
At September 30, the stated or notional amounts of the Company's
outstanding forward exchange contracts and currency options, classified as held
for purposes other than trading, were as follows:
2000 1999
- ----------------------------------------------------------------------------
Forward exchange contracts $467,474 $396,981
Currency options 410,072 22,000
---------------------
$877,546 $418,981
=====================
At September 30, 2000, $564,963 of the forward exchange contracts and
currency options mature within 90 days and $312,583 at various other dates in
fiscal 2001.
The Company's foreign exchange hedging activities do not generally create
exchange rate risk since gains and losses on these contracts generally offset
losses and gains on the underlying positions.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, which is required to be adopted in fiscal years beginning after June
15, 2000. The Company will adopt the provisions of this Statement effective
October 1, 2000. This Statement requires that all derivatives be recorded in the
balance sheet as either an asset or liability measured at fair value and that
changes in fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company began to purchase option contracts at the end of fiscal 2000 to
partially protect against foreign currency translation exposure. The cumulative
effect of adoption of this Statement will not be material to our results of
operations or financial condition.
Concentration Of Credit Risk
Substantially all of the Company's trade receivables are due from public and
private entities involved in the healthcare industry. Due to the large size and
diversity of the Company's customer base, concentrations of credit risk with
respect to trade receivables are limited. The Company does not normally require
collateral. The Company is exposed to credit loss in the event of nonperformance
by financial institutions with which it conducts business. The Company minimizes
exposure to such risk, however, by dealing only with major international banks
and financial institutions.
41
Notes Becton, Dickinson and Company
12
================================================================================
Shareholders' Equity
Changes in certain components of shareholders' equity were as follows:
42
Becton, Dickinson and Company
Common stock held in trusts represents rabbi trusts in connection with the
Company's employee salary and bonus deferral plan and Directors' deferral plan.
In 1998, the Board of Directors authorized a two-for-one stock split. Par
value remained at $1.00 per common share, and the number of authorized common
shares increased from 320,000,000 to 640,000,000 shares. The stock split was
recorded by reclassifying $166,331, the par value of the additional shares
resulting from the split, from Capital in excess of par value and Retained
earnings to Common stock.
Preferred Stock Purchase Rights
In accordance with the Company's shareholder rights plan, each certificate
representing a share of outstanding common stock of the Company also represents
one Preferred Stock Purchase Right (a "Right"). Each whole Right entitles the
registered holder to purchase from the Company one eight-hundredths of a share
of Preferred Stock, Series A, par value $1.00 per share, at a price of $67.50.
The Rights will not become exercisable unless and until, among other things, a
third party acquires 15% or more of the Company's outstanding common stock. The
Rights are redeemable under certain circumstances at $.01 per Right and will
expire, unless earlier redeemed, on April 25, 2006. There are 500,000 shares of
preferred stock designated Series A, none of which has been issued.
13
================================================================================
Comprehensive Income
The components of Accumulated other comprehensive loss are as follows:
2000 1999
- --------------------------------------------------------------------------
Cumulative currency translation
adjustments $(341,068) $(179,764)
Unrealized losses on investments (321) (2,879)
---------------------
$(341,389) $(182,643)
=====================
Generally, the net assets of foreign operations are translated into U.S.
dollars using current exchange rates. The U.S. dollar results that arise from
such translation, as well as exchange gains and losses on intercompany balances
of a long-term investment nature, are included in the cumulative currency
translation adjustments in Accumulated other comprehensive loss.
The income taxes related to Other Comprehensive (Loss) Income were not
significant in any year presented, as income taxes were generally not provided
for translation adjustments.
The unrealized gains (losses) on investments included in other
comprehensive loss for 2000 are net of reclassification adjustments of $28,000,
net of tax, for realized gains on sales of available-for-sale securities as
defined by SFAS No. 115. The tax expense associated with the reclassification
adjustments was $19,500.
14
================================================================================
Commitments and Contingencies
Commitments
Rental expense for all operating leases amounted to $49,200 in 2000, $46,000 in
1999, and $44,800 in 1998. Future minimum rental commitments on noncancelable
leases are as follows: 2001-$31,500; 2002-$25,800; 2003-$18,700; 2004-$15,000;
2005-$12,100 and an aggregate of $39,100 thereafter.
As of September 30, 2000, the Company has certain future capital
commitments aggregating approximately $142,500, which will be expended over the
next several years.
Contingencies
The Company, along with a number of other manufacturers, has been named as a
defendant in approximately 390 product liability lawsuits related to natural
rubber latex that have been filed in various state and Federal courts. Cases
pending in Federal court are being coordinated under the matter In re Latex
Gloves Products Liability Litigation (MDL Docket No. 1148) in Philadelphia, and
analogous procedures have been implemented in the state courts of California,
Pennsylvania, New Jersey and New York. Generally, these actions allege that
medical personnel have suffered allergic reactions ranging from skin irritation
to anaphylaxis as a result of exposure to medical gloves containing natural
rubber latex. In 1986, the Company acquired a business which manufactured, among
other things, latex surgical gloves. In 1995, the Company divested this glove
business. The Company is vigorously defending these lawsuits.
The Company, along with another manufacturer and several medical product
distributors, has been named as a defendant in eleven product liability lawsuits
relating to healthcare workers who allegedly sustained accidental needlesticks,
but have not become infected with any disease. The case brought in California
under the caption Chavez vs. Becton Dickinson (Case No. 722978, San Diego County
Superior Court), filed on August 4, 1998 was dismissed in a judgment filed March
19, 1999. On August 29, 2000, the appellate court affirmed the dismissal of the
product liability claims, leaving only a pending statutory claim for which the
court has stated the plaintiff cannot recover damages. The case brought in
Florida under the caption Delgado vs. Becton Dickinson et al. (Case No. 98-5608,
Hillsborough County Circuit Court), filed on July 24, 1998, was voluntarily
withdrawn by the plaintiffs on March 8, 1999. Cases have been filed on behalf of
an unspecified number of healthcare workers in nine other states, seeking class
action certification under the laws of these states. To date, no class has been
certified in any of these cases. The nine remaining actions are pending in
state court in Texas, under the caption Usrey vs. Becton Dickinson et al. (Case
No. 342-173329-98, Tarrant County District Court), filed on April 9, 1998; in
Federal court in Ohio, under the caption Grant vs. Becton Dickinson et al. (Case
No. C2 98-844, Southern District of Ohio), filed on July 22, 1998; in state
court in Illinois, under the caption McCaster vs. Becton Dickinson et al. (Case
No. 98L09478, Cook County Circuit Court), filed on August 13, 1998; in state
court in
43
Notes Becton, Dickinson and Company
Oklahoma, under the caption Palmer vs. Becton Dickinson et al. (Case No. CJ-98-
685, Sequoyah County District Court), filed on October 27, 1998; in state court
in Alabama, under the caption Daniels vs. Becton Dickinson et al. (Case No. CV
1998 2757, Montgomery County Circuit Court), filed on October 30, 1998; in state
court in South Carolina, under the caption Bales vs. Becton Dickinson et al.
(Case No. 98-CP-40-4343, Richland County Court of Common Pleas), filed on
November 25, 1998; in state court in Pennsylvania, under the caption Brown vs.
Becton Dickinson et al. (Case No. 03474, Philadelphia County Court of Common
Pleas), filed on November 27, 1998; in state court in New Jersey, under the
caption Pollak, Swartley vs. Becton Dickinson et al. (Case No. L-9449-98, Camden
County Superior Court), filed on December 7, 1998; and in state court in New
York, under the caption Benner vs. Becton Dickinson et al. (Case No. 99-111372,
Supreme Court of the State of New York), filed on June 1, 1999. Generally, these
remaining actions allege that healthcare workers have sustained needlesticks
using hollow-bore needle devices manufactured by the Company and, as a result,
require medical testing, counseling and/or treatment. Several actions
additionally allege that the healthcare workers have sustained mental anguish.
Plaintiffs seek money damages in all remaining actions.
In June 1999, a class certification hearing was held in the matter of Usrey
vs. Becton Dickinson et al., which first was filed in Texas state court on April
9, 1998 under the caption Calvin vs. Becton Dickinson et al. The Court has
advised the parties by letter received on October 27, 1999, that it believes it
is appropriate to address the issues in the case by way of a class action under
Texas procedural law. The Company has filed an interlocutory appeal from that
ruling. This appeal is currently pending.
The Company continues to oppose class action certification in these cases
and will continue vigorously to defend these lawsuits, including pursuing all
appropriate rights of appeal.
The Company has insurance policies in place, and believes that a
substantial portion of defense costs and potential liability, if any, in the
latex and class action matters will be covered by insurance. In order to protect
its rights to coverage, the Company has filed an action for declaratory judgment
under the caption Becton Dickinson and Company vs. Adriatic Insurance Company et
al. (Docket No. MID-L-3649-99 MT, Middlesex County Superior Court) in New Jersey
state court. The Company also has established reserves to cover reasonably
anticipated defense costs in all product liability lawsuits, including the
needlestick class action and latex matters.
The Company, along with another manufacturer, a group purchasing
organization ("GPO") and three hospitals, has been named as a defendant in an
antitrust action brought pursuant to the Texas Free Enterprise Act ("TFEA"). The
action is pending in state court in Texas, under the caption Retractable
Technologies Inc. vs. Becton Dickinson and Company et al. (Case No. 5333*JG98,
Brazoria County District Court), filed on August 4, 1998. Plaintiff, a
manufacturer of retractable syringes, alleges that our contracts with GPOs
exclude plaintiff from the market in syringes and blood collection products, in
violation of the TFEA. Plaintiff also alleges that the Company has conspired
with other manufacturers to maintain its market share in these products.
Plaintiff seeks money damages. This action is in preliminary stages. The Company
intends to mount a vigorous defense in this action.
The Company, along with another patent holder, has filed an action for
patent infringement under the caption Becton Dickinson and Company et al. vs. B.
Braun Medical, Inc. (Case No. 2:99-CV-00987J, United States District Court for
the District of Utah), on December 15, 1999. The defendant has filed a
counterclaim against us, and alleges, among other things, that its contacts with
group purchasing organizations exclude defendant from the market in IV
catheters, in violation of the Sherman, Clayton, and Lanham Acts. Defendant also
alleges that the Company has conspired with other manufacturers to maintain its
market share in these products. Defendant seeks money damages. The pending
action is in preliminary stages. The Company intends to prosecute its claim, and
vigorously defend against this counterclaim.
In the patent infringement litigation under the caption Critikon, Inc. vs.
Becton Dickinson Vascular Access, Inc. (Civ. 93-108 (JJF), United States
District Court for the District of Delaware) the Court, on May 19, 2000, entered
judgment in favor of the plaintiff in the aggregate amount of $5,700, excluding
any potential interest charges. The Company has filed pending postjudgment
motions seeking recalculation of damages on the basis of perceived error in the
calculation of damages, in both amount and duration. The Company will continue
to vigorously defend this lawsuit. The Company has established reserves to cover
liabilities, if any, in this matter, based upon its best estimate within the
range of possible losses.
The Company also is involved in other legal proceedings and claims which
arise in the ordinary course of business, both as a plaintiff and a defendant.
While it is not possible to predict or determine the outcome of the patent,
product liability, antitrust or other legal actions brought against the Company,
upon resolution of such matters, the Company may incur charges in excess of
presently established reserves. While such future charges, individually and in
the aggregate, could have a material adverse impact on the Company's net income
and net cash flows in the period in which they are recorded or paid, in the
Company's opinion, the results of the above matters, individually and in the
aggregate, are not expected to have a material adverse effect on the Company's
consolidated financial condition.
The Company believes that its operations comply in all material respects with
applicable laws and regulations. The Company is a party to a number of Federal
proceedings in the United States brought under the Comprehensive Environment
Response, Compensation and Liability Act, also known as "Superfund," and similar
state laws. For all sites,
44
Becton, Dickinson and Company
there are other potentially responsible parties that may be jointly or severally
liable to pay all cleanup costs. The Company accrues costs for estimated
environmental liabilities based upon its best estimate within the range of
probable losses, without considering possible third-party recoveries. Upon
resolution of these proceedings, the Company may incur charges in excess of
presently established accruals. While such future costs could have a material
adverse impact on the Company's net income and net cash flows in the period in
which they are recorded or paid, in the Company's opinion, the results of the
above matters are not expected to have a material adverse effect on its
consolidated financial condition.
15
- --------------------------------------------------------------------------------
Stock Plans
Stock Option Plans
The Company has stock option plans under which options have been granted to
purchase shares of the Company's common stock at prices established by the
Compensation and Benefits Committee of the Board of Directors. The 1995 and 1998
Stock Option Plans made available 24,000,000 and 10,000,000 shares of the
Company's common stock for the granting of options to employees, respectively.
At September 30, 2000, shares available for future grant under the 1995 and 1998
Plans were 1,166,458 and 9,418,000, respectively. The Non-Employee Directors
2000 Stock Option Plan made available 1,000,000 common shares for the granting
of options, of which 970,660 remained available for future grant as of September
30, 2000. All stock plan data has been retroactively restated to reflect the
two-for-one stock splits in 1998, 1996 and 1993, where applicable.
A summary of changes in outstanding options is as follows:
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has adopted the disclosure-only provision of the Statement and applies
APB Opinion No. 25 and related interpretations in accounting for its employee
stock plans.
The 1990 Stock Option Plan, which expired in May 2000, had a provision
whereby unqualified options could be granted at, below, or above market value of
the Company's stock. If the option price was less than the market value of the
Company's stock on the date of grant, the discount would be recorded as
compensation expense over the service period in accordance with the provisions
of APB Opinion No. 25. There was no such compensation expense in 2000, 1999 or
1998.
45
Notes Becton, Dickinson and Company
Under certain circumstances, the stock option plans permit the optionee the
right to receive cash and/or stock at the Company's discretion equal to the
difference between the market value on the date of exercise and the option
price. This difference would be recorded as compensation expense over the
vesting period.
The following pro forma net income and earnings per share information has
been determined as if the Company had accounted for its stock-based compensation
awards issued subsequent to October 1, 1995 using the fair value method. Under
the fair value method, the estimated fair value of awards would be charged
against income on a straight-line basis over the vesting period, which generally
ranges from zero to three years. The pro forma effect on net income for 2000,
1999 and 1998 is not representative of the pro forma effect on net income in
future years since compensation cost is allocated on a straight-line basis over
the vesting periods of the grants, which extends beyond the reported years.
The pro forma amounts and fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998: risk free
interest rates of 6.64%, 4.79% and 5.55%, respectively; expected dividend yields
of 1.09%, 1.09% and 1.28%, respectively; expected volatility of 35.4%, 31.0% and
24.4%, respectively; and expected lives of 6 years for each year presented.
Other Stock Plans
The Company has a compensatory Stock Award Plan which allows for grants of
common shares to certain key employees. Distribution of 25% or more of each
award, as elected by the grantee, is deferred until after retirement or
involuntary termination. Commencing on the first anniversary of a grant
following retirement, the remainder is distributable in five equal annual
installments. During 2000, 76,798 shares were distributed. No awards were
granted in 2000, 1999 or 1998. At September 30, 2000, 2,456,018 shares were
reserved for future issuance, of which awards for 354,630 shares have been
granted.
The Company has a compensatory Restricted Stock Plan for Non-Employee
Directors which reserves for issuance 300,000 shares of the Company's common
stock. No restricted shares were issued in 2000, 1999 or 1998.
The Company has a Directors' Deferral Plan which provides a means to defer
director compensation, from time to time, on a deferred stock or cash basis. As
of September 30, 2000, 144,054 shares were held in trust, of which 16,042 shares
represented directors' compensation in 2000, in accordance with the provisions
of the Plan. Under the Plan, which is unfunded, directors have an unsecured
contractual commitment from the Company to pay directors the amounts due to them
under the Plan.
16
- --------------------------------------------------------------------------------
Earnings Per Share
For the years ended September 30, 2000, 1999 and 1998, the following table sets
forth the computations of basic and diluted earnings per share (shares in
thousands):
46
Becton, Dickinson and Company
17
- --------------------------------------------------------------------------------
Segment Data
The Company's organizational structure is based upon its three principal
business segments: BD Medical Systems ("Medical"), BD Biosciences
("Biosciences"), and BD Preanalytical Solutions ("Preanalytical"). The Company's
segments are managed separately because each requires different technology and
marketing strategies.
The major products in the Medical segment are hypodermic products, specially
designed devices for diabetes care, prefillable drug delivery systems, infusion
therapy products, elastic support products and thermometers. The Medical segment
also includes disposable scrubs, specialty needles and surgical blades. The
major products in the Biosciences segment are clinical and industrial
microbiology products, flow cytometry systems for cellular analysis, tissue
culture labware, hematology instruments and other diagnostic systems, including
immunodiagnostic test kits. The major products in the Preanalytical segment are
sample collection products and specimen management systems. This segment also
includes consulting services and customized, automated bar-code systems.
In June 2000, the Company initiated a plan to change the structure of its
internal organization in a manner that, beginning October 1, 2000, will cause
the composition of the reportable segments to change. During the first quarter
of fiscal 2001, execution of the planned changes will be finalized so that for
the quarter ending December 31, 2000, decisions about resource allocation and
performance assessment will be made separately for the reorganized Medical
segment, the new Clinical Laboratory Solutions segment and the reorganized
Biosciences segment. As of December 31, 2000, financial reporting for these
three segments will be presented and the corresponding information for earlier
periods will be restated to reflect the new segment reporting structure.
The Company evaluates performance based upon operating income. Segment
operating income represents revenues reduced by product costs and operating
expenses. The calculations of segment operating income and assets are in
accordance with the accounting policies described in Note 1.
Distribution of products is both through distributors and directly to
hospitals, laboratories and other end users. Sales to a distributor which
supplies the Company's products to many end users accounted for approximately
10% of revenues in 2000, 11% in 1999 and 11% in 1998, and included products from
each of the Company's segments. No other customer accounted for 10% or more of
revenues in each of the three years presented.
(A) Intersegment revenues are not material.
(B) Includes $39,844 in 2000, $60,933 in 1999 and $43,181 in 1998 for special
charges discussed in Note 5, as well as a charge of $30,000 in 1998 for
purchased in-process research and development discussed in Note 2.
(C) Includes $9,314 in 2000, $4,962 in 1999 and $43,314 in 1998 for special
charges discussed in Note 5, as well as $48,800 in 1999 for purchased in-
process research and development charges discussed in Note 2.
(D) Includes $2,959 in 2000, $4,429 in 1999 and $2,238 in 1998 for special
charges discussed in Note 5.
(E) Includes interest, net, foreign exchange and corporate expenses. Also
includes special charges of $5,397, $5,229 and $2,212 in 2000, 1999 and
1998, respectively, as discussed in Note 5.
(F) Includes cash and investments and corporate assets.
47
Notes Becton, Dickinson and Company
Geographic Information
The countries in which the Company has local revenue-generating operations have
been combined into the following geographic areas: the United States, including
Puerto Rico, and International, which is composed of Europe, Canada, Latin
America, Japan and Asia Pacific.
Revenues to unaffiliated customers are based upon the source of the product
shipment. Long-lived assets, which include net property, plant and equipment,
are based upon physical location. Intangible assets are not included since, by
their nature, they do not have a physical or geographic location.
(A) Includes $57,514 of special charges in the fourth quarter.
(B) Includes $75,553 of special charges in the third quarter and $48,800 for
purchased in-process research and development charges.
48
Becton, Dickinson and Company
Corporate Information
Board of Directors