01—Abstract
Summary
Summary of the 10-K filed December 16, 1998. Cited figures are marked; the original filing is the authoritative source.
Becton, Dickinson and Company's fiscal 1998 (year ended September 30, 1998) was a year of strong top-line growth overshadowed by one-time charges and a large acquisition.
Worldwide revenues rose 11% to $3.12 billiona (up 14% excluding unfavorable currency translation, with acquisitions contributing 7 points), driven by infusion therapy, hypodermic products, sample collection devices and FACS flow cytometry. Gross margin improved to 50.6% from 49.7%, and the company said operating margin excluding special charges and acquisition effects rose to 18.7%. However, reported net income fell 21% to $237 million, and diluted EPS dropped to $0.90 from $1.15, reflecting $91 million in special charges (manufacturing restructuring, including a surgical blade plant closure, and an impairment in manual microbiology goodwill), $22 million of business-systems reengineering charges, and a $30 million in-process R&D write-off tied to the roughly $457 million purchase of BOC's Medical Devices Division.
Management's underlying diluted EPS growth excluding these items was 19%. The balance sheet expanded materially. Total assets rose to $3.85 billionb from $3.08 billion, and total debt increased by $352 million, pushing debt-to-capitalization to 41.4% from 36.3%.
Short-term debt rose to 33% of total debt, and return on equity fell to 15.8% from 22.1%. Operating cash flow was $501 millionc, capital expenditures were $181 million, and acquisitions consumed $537 million net of cash acquired. Share repurchases were sharply reduced to $44 million, and a two-for-one stock split was completed in August 1998.
Management indicated that it intends to use substantial excess cash for further acquisitions, which implies that the buyback program will remain subordinate to deal-making. The filing also highlights ongoing legal and regulatory risk. The company faces roughly 194 latex glove product liability suits and multiple needle-stick class actions and antitrust claims, including a Texas case brought by Retractable Technologies.
Management says none is expected to be material. Year 2000 remediation is roughly 50-55% complete as of October 1998, with a total estimated cost of about $15 milliond and completion targeted for 1999.
02—Key points
Key Highlights
- Revenue grew 11% to $3.12 billion, or 14% excluding currency effects, with acquisitions adding 7 points; Medical revenue rose 14% to $1.71 billion and Diagnostic revenue rose 8% to $1.40 billion.
- Diluted EPS fell to $0.90 from $1.15, and net income fell to $237 million from $300 million, mainly due to $91 million in special charges, $22 million in reengineering costs, and a $30 million purchased in-process R&D write-off.
- Gross margin improved to 50.6% from 49.7%, and management says underlying diluted EPS grew 19% excluding one-time items and currency effects.
- Total assets rose 25% to $3.85 billion after acquisitions, including the ~$457 million BOC Medical Devices Division purchase, and goodwill plus intangibles roughly tripled to about $746 million.
- Debt-to-capitalization rose to 41.4% from 36.3%, total debt increased $352 million, and return on equity fell to 15.8% from 22.1%.
- Operating cash flow was $501 million, and share repurchases were cut to $44 million from $150 million, with management prioritizing acquisitions for surplus cash.
- Ongoing litigation includes about 194 latex glove product liability suits and needle-stick class actions; management believes these are not material, but Year 2000 remediation was only about half complete as of October 1998.
03—Questions
Frequently Asked Questions
Why did BD's earnings per share decline in fiscal 1998 even though revenue grew 11%?
Diluted EPS fell to $0.90 from $1.15 because of one-time items. These included $91 million in special charges for manufacturing restructuring and an impairment on manual microbiology goodwill, $22 million in business-systems reengineering costs, and a $30 million write-off of purchased in-process R&D from the MDD acquisition. Those items cut EPS by about $0.47 in total, and currency translation reduced it by another $0.07. Management says underlying EPS grew 19%.
What did BD acquire in 1998, and how did it affect the balance sheet?
BD acquired six businesses for about $546 million in cash and up to 595,520 shares, the largest being the Medical Devices Division of The BOC Group (about $457 million). Goodwill rose to $412 million from $164 million, and other intangibles rose to $334 million from $168 million. Acquisitions drove most of the increase in total debt and the rise in debt-to-capitalization to 41.4%.
Is BD's debt load becoming a concern for investors?
Debt has risen meaningfully. Total debt increased $352 million, short-term debt grew to 33% of total debt, and debt-to-capitalization reached 41.4% from 36.3%. Management, however, states it has a high degree of confidence in refinancing, supported by $500 million in committed credit facilities (none drawn at year end), $300 million remaining on a shelf registration, and a weighted average cost of debt of 7.3%.
What are the main legal risks disclosed in the filing?
The main risks are product liability suits over natural rubber latex gloves (about 194 cases, tied to a business BD divested in 1995), several needle-stick injury class actions filed across multiple states that allege mental anguish and seek class certification, and a Texas antitrust suit from Retractable Technologies alleging exclusionary GPO contracts. BD says it is vigorously defending all of them and that none is expected to have a material effect on financial results.
Will BD's share buybacks resume at prior levels?
Probably not in the near term. Repurchases fell to $44 million in 1998 from $150 million in 1997. Management said it expects to limit future repurchases and to prioritize funding business needs and acquisitions. About 21.3 million shares remain authorized under the March 1998 resolution, but the company has made clear that acquisitions come first.
04—Continue