01—Abstract
Summary
Summary of the 10-K filed December 23, 2003. Cited figures are marked; the original filing is the authoritative source.
Becton, Dickinson and Company (BD) reported fiscal 2003 (year ended September 30, 2003) revenues of $4.53 billiona, up 12% year over year, of which roughly 4 points came from favorable foreign currency translation and about 8% was underlying volume-driven growth.
Net income rose 14% to $547 million, and diluted EPS increased to $2.07b from $1.79. Growth was broad-based across the three segments: BD Medical revenues grew 14% to $2.5 billion, driven by safety-engineered devices and the launch of blood glucose monitoring products; BD Diagnostics grew 11% to $1.4 billion, led by the BD ProbeTec ET molecular platform and safety-engineered preanalytical products; and BD Biosciences grew 8% to $697 million, though it was weighed down by a $27 million impairment tied to discontinuing BD IMAGN development and by Clontech reagent weakness. Operating margin was roughly flat at 16.5%, and gross margin was 48.4%, with the safety-engineered device transition supporting margins even as selling and administrative expense rose to 26.7% of revenues on IT and product-launch spending.
Balance sheet and cash flow data show a larger, more leveraged company. Total assets grew to $5.57 billion and long-term debt rose to $1.18 billionc after $400 million of April 2003 notes were issued to refinance commercial paper. Operating cash flow was $906 million, capital expenditures were $261 million, and BD repurchased about $350 million of stock.
Debt-to-capitalization improved to 30.4% from 32.6%. The company made a $100 milliond contribution to its U.S. pension plan, and management expects pension expense to rise by about $18 million in 2004. In the fourth quarter BD also changed its inventory costing method from LIFO to FIFO, applied retroactively.
The change reduced inventories by $11.5 million and retained earnings by $7.1 million and did not affect reported income. Risk disclosures center on product liability and antitrust litigation. These include roughly 524 latex glove suits, a Retractable Technologies antitrust suit with a trial scheduled for February 2004, a British Columbia class action over BD ProbeTec ET test results, and needlestick class actions.
Management states the claims lack merit but acknowledges that outcomes could exceed reserves and materially affect results. Other risks include group purchasing organization scrutiny, pricing pressure from healthcare consolidation, emerging-market and currency exposure (about half of revenue is international), and the SARS epidemic.
02—Key points
Key Highlights
- Revenue grew 12% to $4.53 billion in FY2003, with about 8% underlying growth and about 4 points from favorable currency translation.
- Diluted EPS rose 16% to $2.07 (from $1.79), and net income increased 14% to $547 million.
- BD Medical led growth at 14% (10% underlying), supported by safety-engineered syringes and the launch of blood glucose monitoring.
- Safety-engineered device sales continued to drive gross margin, which held at 48.4%, though a $27 million Biosciences impairment and $34 million in non-cash charges weighed on the quarter.
- Long-term debt increased to $1.18 billion after $400 million in new notes, and debt-to-capitalization improved to 30.4%.
- Operating cash flow of $906 million covered $261 million of capex and about $350 million of share repurchases.
- Ongoing litigation includes a Retractable Technologies antitrust case (trial set for February 2004) and product liability and latex glove suits, with management saying the outcomes could exceed reserves.
03—Questions
Frequently Asked Questions
What drove BD's revenue growth in fiscal 2003?
Revenue rose 12% to $4.53 billion, with about 8 points from underlying volume growth and about 4 points from favorable foreign currency translation. Growth was led by safety-engineered devices, the BD ProbeTec ET molecular platform, and the launch of blood glucose monitoring products, with international revenue up 17%.
Did BD's profitability improve, and were there any one-time charges?
Net income rose 14% to $547 million and diluted EPS rose to $2.07 from $1.79. Operating margin was about flat at 16.5%. Results include $34 million of non-cash charges in Q3 related to discontinuing BD IMAGN product development, including a $27 million impairment. Excluding these, the company said operating margin was about the same as the prior year.
Has BD changed its accounting in a way that affects comparability?
Yes. In Q4 2003 BD switched inventory costing from LIFO to FIFO and restated prior periods. The change had no effect on reported income but reduced inventories by $11.5 million and retained earnings by $7.1 million. Prior-year balance sheet figures were restated accordingly.
What are the main litigation risks investors should watch?
The key matters are the Retractable Technologies antitrust suit alleging exclusionary long-term contracts (trial set for February 3, 2004), a British Columbia class action over BD ProbeTec ET results, roughly 524 latex glove product liability suits, and needlestick class actions. BD believes the claims lack merit, but it states that adverse outcomes could exceed reserves and insurance and have a material effect on results and cash flow.
How is BD's balance sheet and capital allocation positioned?
Total assets grew to $5.57 billion and long-term debt rose to $1.18 billion after April 2003 note issuances used to repay commercial paper. Debt-to-capitalization improved to 30.4%, and the company holds A2/A+ credit ratings with a $900 million credit facility. BD repurchased about $350 million of stock and paid $104 million in dividends. Management also flagged a $100 million pension contribution and about $18 million of higher expected 2004 pension expense.
04—Continue