Why did BD's reported diluted EPS decline in fiscal 2004 even though revenue and continuing operations improved?

Reported diluted EPS fell to $1.77 from $2.07 because of a $115 million after-tax loss from discontinued operations, mainly a $124 million pre-tax write-down tied to the planned sale of Clontech, equal to $0.44 per share. Continuing operations still improved, with diluted EPS rising to $2.21 from $2.10. That figure includes the $100 million Retractable Technologies settlement and the $45 million BGM charge, which together reduced EPS by about $0.35.

How much of BD's fiscal 2004 revenue growth came from currency versus underlying business growth?

Total revenue growth was 11%, to $4.93 billion. About 5 percentage points came from favorable foreign currency translation, and underlying growth at constant exchange rates was about 6%, driven mainly by volume increases across all three segments. International revenue grew 15% reported and about 6% underlying.

What are the most significant legal risks disclosed in the 10-K?

The main exposures are roughly 523 latex glove product liability suits; class actions over alleged needlestick injuries in Ohio, Oklahoma, South Carolina, and Illinois; a British Columbia class action over personal injury claims tied to the ProbeTec ET instrument; a sealed qui tam False Claims Act complaint; a U.S. Attorney subpoena; and patent suits from Therasense (blood glucose products) and Greiner (Hemogard caps and Vacutainer Plus tubes). BD says these claims are without merit and has accrued only for probable, estimable losses. It also warns that charges above current accruals could be material to results and cash flows.

What does BD expect for fiscal 2005?

Management expects underlying revenue growth of about 7%, with segment growth of about 7% for Medical, 6–7% for Diagnostics, and 7–8% for Biosciences. It expects SG&A as a percentage of revenue to fall by 75–100 basis points and R&D spending to rise 12–15%. The effective tax rate is expected to be about 26%, and stock-based compensation under SFAS 123 and the long-term incentive plan should reduce diluted EPS by $0.15–0.17. Capital expenditures are expected at $300–325 million, and share repurchases at $400–450 million.

Is there any concern about BD's auditor independence?

Yes. Ernst & Young disclosed that, in 2001 and 2002, its affiliates prepared tax returns for BD expatriate employees in China and Japan and paid the taxes using BD funds. Custody of client funds is not permitted under auditor independence rules. The fees were small, under $2,000 for China and about $33,000 for Japan. E&Y concluded that its independence was not impaired, citing the ministerial nature of the services and the low fees. The Audit Committee reviewed the matter, and E&Y reported to the PCAOB and the SEC that it remained independent.

BDX 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 13, 2004. Cited figures are marked; the original filing is the authoritative source.

Becton, Dickinson and Company (BD) reported fiscal 2004 (year ended September 30, 2004) revenues of $4.93 billion^a, up 11% from $4.46 billion in fiscal 2003.

Underlying growth at constant currency was 6%, with favorable foreign exchange contributing about 5 points. Diluted EPS from net income was $1.77^b, down from $2.07, mainly due to a $115 million after-tax loss from discontinued operations tied to the planned sale of the Clontech unit, a $100 million Retractable Technologies antitrust settlement, and a $45 million charge related to blood glucose monitoring (BGM) products. Excluding these items, income from continuing operations rose to $2.21 diluted EPS from $2.10 in 2003, and operating income increased to $787 million from $761 million.

The balance sheet and cash flow profile remain strong. Cash from continuing operations rose to $1.1 billion^c from $903 million, and BD repurchased about $450 million of stock while paying $152 million in dividends. The debt-to-capitalization ratio improved to 28.1% from 30.4%, and the company's long-term debt is rated A2/A+.

Management guides to about 7% underlying revenue growth in fiscal 2005, a tax rate near 26% (which could rise if foreign earnings are repatriated under the American Jobs Creation Act), and a $0.15 to $0.17^d EPS headwind from expensing stock compensation and the new long-term incentive plan. Investors should weigh several legal and regulatory exposures. These include roughly 523 latex glove product liability suits, class actions over needlestick injuries, a British Columbia class action tied to the ProbeTec ET instrument, an unserved qui tam False Claims Act complaint under seal, a U.S. Attorney subpoena, and patent suits from Therasense and Greiner.

Management says it cannot estimate potential losses and that charges above current accruals could be material. Separately, Ernst & Young disclosed non-audit services in China and Japan that conflicted with auditor independence rules, though it concluded its independence was not impaired.

02—Key points

Key Highlights

Revenue grew 11% to $4.93 billion, with 6% underlying growth at constant currency and about 5 points from favorable FX. Growth was led by BD Medical ($2.68B), BD Diagnostics ($1.53B), and BD Biosciences ($723M).
Reported diluted EPS fell to $1.77 from $2.07, but income from continuing operations rose to $2.21 from $2.10 before the $0.44 loss from discontinued operations (Clontech sale), the $100M RTI litigation settlement, and the $45M BGM charge.
Operating margin was about 16%, down from 17.1%, because of the $100M settlement and BGM charges. Gross margin improved to 49.3% from 48.5%, helped by safety-engineered devices, BGM products, and the ProbeTec ET platform.
Operating cash flow from continuing operations reached $1.1 billion, up from $903 million. BD repurchased about $450 million of stock and paid $152 million in dividends, with dividends per share rising to $0.60 from $0.40.
Balance sheet strengthened: debt-to-capitalization improved to 28.1% from 30.4%, cash rose to $719 million, and the $900 million credit facility was extended to 2009 with no borrowings outstanding.
Fiscal 2005 guidance calls for about 7% underlying revenue growth, a roughly 26% effective tax rate, $400–450M in share repurchases, and a $0.15–0.17 diluted EPS impact from stock-based compensation. Repatriation under the AJCA could further raise the tax rate.
Significant contingent liabilities remain across latex glove and needlestick product liability suits, the British Columbia ProbeTec class action, a sealed qui tam False Claims Act complaint, and a U.S. Attorney subpoena. Management cannot estimate potential losses, and charges could be material.

03—Questions

Frequently Asked Questions

Why did BD's reported diluted EPS decline in fiscal 2004 even though revenue and continuing operations improved?
Reported diluted EPS fell to $1.77 from $2.07 because of a $115 million after-tax loss from discontinued operations, mainly a $124 million pre-tax write-down tied to the planned sale of Clontech, equal to $0.44 per share. Continuing operations still improved, with diluted EPS rising to $2.21 from $2.10. That figure includes the $100 million Retractable Technologies settlement and the $45 million BGM charge, which together reduced EPS by about $0.35.
How much of BD's fiscal 2004 revenue growth came from currency versus underlying business growth?
Total revenue growth was 11%, to $4.93 billion. About 5 percentage points came from favorable foreign currency translation, and underlying growth at constant exchange rates was about 6%, driven mainly by volume increases across all three segments. International revenue grew 15% reported and about 6% underlying.
What are the most significant legal risks disclosed in the 10-K?
The main exposures are roughly 523 latex glove product liability suits; class actions over alleged needlestick injuries in Ohio, Oklahoma, South Carolina, and Illinois; a British Columbia class action over personal injury claims tied to the ProbeTec ET instrument; a sealed qui tam False Claims Act complaint; a U.S. Attorney subpoena; and patent suits from Therasense (blood glucose products) and Greiner (Hemogard caps and Vacutainer Plus tubes). BD says these claims are without merit and has accrued only for probable, estimable losses. It also warns that charges above current accruals could be material to results and cash flows.
What does BD expect for fiscal 2005?
Management expects underlying revenue growth of about 7%, with segment growth of about 7% for Medical, 6–7% for Diagnostics, and 7–8% for Biosciences. It expects SG&A as a percentage of revenue to fall by 75–100 basis points and R&D spending to rise 12–15%. The effective tax rate is expected to be about 26%, and stock-based compensation under SFAS 123 and the long-term incentive plan should reduce diluted EPS by $0.15–0.17. Capital expenditures are expected at $300–325 million, and share repurchases at $400–450 million.
Is there any concern about BD's auditor independence?
Yes. Ernst & Young disclosed that, in 2001 and 2002, its affiliates prepared tax returns for BD expatriate employees in China and Japan and paid the taxes using BD funds. Custody of client funds is not permitted under auditor independence rules. The fees were small, under $2,000 for China and about $33,000 for Japan. E&Y concluded that its independence was not impaired, citing the ministerial nature of the services and the low fees. The Audit Committee reviewed the matter, and E&Y reported to the PCAOB and the SEC that it remained independent.

04—Continue

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