What drove BD's revenue growth in fiscal 2002?

Revenue rose 8% to $4.03 billion, mainly from volume increases in all three segments. The largest contributor was the shift to safety-engineered devices, whose sales grew 38% to $573 million. Biosciences growth came from BD FACS flow cytometry systems, and Medical growth was partly offset by lower U.S. conventional device sales and weak Latin America demand.

Did earnings quality or margins deteriorate?

Reported earnings rose strongly, but margins moved slightly lower. Gross margin fell to 48.3% from 48.9%, and operating margin fell to 16.8% from 17.0%. Management attributed this to lower-margin insulin syringe and molecular biology sales, along with 2002 special charges of about $21.5 million. Excluding these items, operating margin was about 17.5% versus 18% in 2001.

How much legal risk does BD face, and could it be material?

BD is named in roughly 520 natural rubber latex glove lawsuits and several needlestick class actions, and it faces an antitrust suit from Retractable Technologies with trial set for April 2003. Management believes the claims are without merit and should not have a material adverse effect, but it cannot estimate the potential loss. The filing explicitly warns that future charges could be material to results of operations and cash flows.

How is BD using its cash and what should investors expect for 2003?

BD used its $836 million of operating cash flow for $260 million of capex, $102 million of dividends, and $224 million of share repurchases, with 3.4 million shares still authorized. Management expects 2003 capex of about $275 million and an extra $24 million of U.S. pension cost, and it anticipates generating excess cash in 2003 for debt repayment and additional buybacks.

Are there any notable one-time items or accounting changes affecting comparisons?

Yes. Fiscal 2002 included $21.5 million of special charges, mostly for a Medical manufacturing restructuring that involves 533 job cuts. Fiscal 2001 included a $36.8 million after-tax cumulative effect charge from SAB 101 revenue recognition changes. Goodwill amortization of about $26 million in 2001 ended under SFAS 142, which added roughly $0.10 to diluted EPS in 2002.

BDX 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 20, 2002. Cited figures are marked; the original filing is the authoritative source.

Becton, Dickinson and Company (BD) closed fiscal 2002 (year ended September 30, 2002) with revenues of $4.03 billion^a, up 8% from $3.75 billion in fiscal 2001, driven mainly by volume growth across all three segments.

Net income rose 19.5% to $480 million and diluted EPS increased to $1.79^b from $1.49 (or $1.63 before the prior year's accounting change). Excluding special charges in 2002 and goodwill amortization in 2001, diluted EPS was $1.85 versus $1.73, so underlying earnings growth was solid. Growth was led by the conversion to safety-engineered devices, which generated $573 million in sales (up 38%), and by Biosciences flow cytometry products.

Operating margin slipped to 16.8% from 17.0% as gross margin declined to 48.3% from 48.9%, reflecting lower insulin syringe and molecular biology sales and Latin America weakness. Cash generation remained strong, with operating cash flow of $836 million^c, although it absorbed a $100 million voluntary pension contribution. Capital expenditures fell to $260 million from $371 million as the safety-device build-out matured, and BD repurchased 6.6 million shares for $224 million.

Debt to capitalization improved to 32.5% from 34.1%, and the company carries A2/A+ credit ratings. Management expects 2003 capital spending of roughly $275 million^d and a $24 million increase in U.S. pension cost, which is a modest headwind. The filing also flags material legal risk.

BD faces roughly 520 natural rubber latex glove suits, class action needlestick litigation in several states, and an antitrust suit from Retractable Technologies with trial set for April 2003. Management states that these matters should not have a material adverse effect, but it cannot estimate potential losses and acknowledges that future charges could be material to results and cash flow.

02—Key points

Key Highlights

Revenue grew 8% to $4.03 billion, driven by volume gains in Medical Systems ($2.15B, +7%), Clinical Lab ($1.24B, +7%), and Biosciences ($645M, +9%).
Safety-engineered device sales rose 38% to $573 million, the main growth engine as BD converts its product lines to safety products.
Net income increased 19.5% to $480 million; diluted EPS of $1.79 compares with $1.49 in 2001, and roughly $1.85 excluding special charges and prior-year goodwill amortization.
Gross margin fell to 48.3% from 48.9% due to weaker insulin syringe and molecular biology sales, and operating margin declined to 16.8% from 17.0%.
Operating cash flow of $836 million funded $260 million in capex and $224 million in share buybacks, even after a $100 million pension contribution.
Balance sheet strengthened: debt to capitalization improved to 32.5% from 34.1%, and short-term debt fell to 35% of total debt.
Litigation exposure remains significant: about 520 latex glove suits, needlestick class actions, and the Retractable Technologies antitrust case (trial April 2003), with no estimate of potential loss.

03—Questions

Frequently Asked Questions

What drove BD's revenue growth in fiscal 2002?
Revenue rose 8% to $4.03 billion, mainly from volume increases in all three segments. The largest contributor was the shift to safety-engineered devices, whose sales grew 38% to $573 million. Biosciences growth came from BD FACS flow cytometry systems, and Medical growth was partly offset by lower U.S. conventional device sales and weak Latin America demand.
Did earnings quality or margins deteriorate?
Reported earnings rose strongly, but margins moved slightly lower. Gross margin fell to 48.3% from 48.9%, and operating margin fell to 16.8% from 17.0%. Management attributed this to lower-margin insulin syringe and molecular biology sales, along with 2002 special charges of about $21.5 million. Excluding these items, operating margin was about 17.5% versus 18% in 2001.
How much legal risk does BD face, and could it be material?
BD is named in roughly 520 natural rubber latex glove lawsuits and several needlestick class actions, and it faces an antitrust suit from Retractable Technologies with trial set for April 2003. Management believes the claims are without merit and should not have a material adverse effect, but it cannot estimate the potential loss. The filing explicitly warns that future charges could be material to results of operations and cash flows.
How is BD using its cash and what should investors expect for 2003?
BD used its $836 million of operating cash flow for $260 million of capex, $102 million of dividends, and $224 million of share repurchases, with 3.4 million shares still authorized. Management expects 2003 capex of about $275 million and an extra $24 million of U.S. pension cost, and it anticipates generating excess cash in 2003 for debt repayment and additional buybacks.
Are there any notable one-time items or accounting changes affecting comparisons?
Yes. Fiscal 2002 included $21.5 million of special charges, mostly for a Medical manufacturing restructuring that involves 533 job cuts. Fiscal 2001 included a $36.8 million after-tax cumulative effect charge from SAB 101 revenue recognition changes. Goodwill amortization of about $26 million in 2001 ended under SFAS 142, which added roughly $0.10 to diluted EPS in 2002.

04—Continue

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