What is BD's outlook for fiscal 2006?

Management expects gross margin to improve by 30 to 40 basis points and SSG&A to fall 40 to 50 basis points as a percentage of revenue. R&D is expected to grow about 12%. Segment revenue growth is guided to 5% to 6% for Medical and Diagnostics and 8% to 9% for Biosciences, after a roughly 2% currency headwind. The effective tax rate is expected to be about 26%, capital expenditures about $400 million, and share repurchases about $450 million. Share-based compensation is expected to reduce EPS by about $0.23.

How strong is BD's balance sheet and cash flow position?

BD generated $1.22 billion of operating cash flow from continuing operations, ended the year with $1.04 billion of cash, and reduced debt-to-capitalization to 27.3%. Total debt was about $1.3 billion, with 16% short-term. BD holds an A2/A+ credit rating and has a $900 million undrawn credit facility. It plans to repatriate about $1.3 billion of foreign earnings in 2006 and made a $150 million discretionary U.S. pension contribution in October 2005.

What are the main risks investors should monitor?

Key risks include pricing pressure from hospital group purchasing organizations and healthcare consolidation, and the potential impact of an inhaled insulin product on insulin injection device sales. Antitrust suits from direct and indirect purchasers of hypodermic products, a Connecticut antitrust subpoena, and a Daniels Sharpsmart suit could affect results. Product liability cases involving latex gloves and needlesticks are pending, with a class certification ruling under appeal. A UN Oil-for-Food inquiry involving a French subsidiary is ongoing. Currency swings and raw material and resin costs also pose risk.

Why did BD's reported EPS and income from discontinued operations differ in 2005?

BD sold its Clontech unit on August 31, 2005 for $62 million, recording a $13 million pre-tax gain and $30 million of after-tax income from discontinued operations, about $0.11 per diluted share. In 2004, BD recorded a $116 million after-tax write-down of Clontech, which produced a $0.44 per-share loss. Continuing operations are presented separately, so 2005 diluted EPS of $2.77 reflects the discontinued gain, while $2.66 reflects continuing operations only.

BDX 10-K FY2005 Annual Report — Revenue, Net Income, EPS

Q: How did BD perform in fiscal 2005 compared with 2004, and what drove the change?

Revenue rose 10% to $5.41 billion. Volume contributed about 6 points, foreign currency about 3 points, and price less than 1 point. Reported net income increased to $722 million from $467 million, but 2004 included a $100 million litigation settlement and $45 million of blood glucose monitoring charges. Fiscal 2005 included $70 million of share-based compensation and a $77 million tax charge tied to repatriation. Income from continuing operations rose to $2.66 per diluted share from $2.21.

01—Abstract

Summary

Summary of the 10-K filed December 9, 2005. Cited figures are marked; the original filing is the authoritative source.

Becton, Dickinson and Company (BD) closed fiscal 2005 (year ended September 30, 2005) with revenues of $5.41 billion^a, up 10% from $4.93 billion in fiscal 2004.

Roughly 6 percentage points of growth came from volume, 3 points from favorable foreign currency translation, and less than 1 point from price. Reported net income rose to $722.3 million^b ($2.77 diluted EPS) from $467.4 million ($1.77) in 2004, but the comparison is distorted by prior-year charges (a $100 million litigation settlement and $45 million of blood glucose monitoring charges) and by fiscal 2005 items (a $70 million share-based compensation expense under SFAS 123(R) and a $77 million one-time tax charge tied to repatriating about $1.3 billion of foreign earnings). Income from continuing operations was $692 million, or $2.66 per diluted share, versus $2.21 in 2004.

Operating margin expanded to 19.0% from 16.0%, and gross margin improved to 50.8% from 49.3%, driven by the mix shift toward safety-engineered devices and higher-margin products. Balance sheet and cash generation remain strong. Operating cash flow from continuing operations was $1.22 billion^c, capital expenditures were $318 million, and cash on hand rose to $1.04 billion.

Debt-to-capitalization improved to 27.3% from 28.1%. BD returned about $550 million^d through share repurchases and paid $182 million in dividends, and the board authorized a new 10 million-share buyback in November 2005. Management guides to 2006 gross margin improvement of 30 to 40 basis points, a 5% to 6% growth outlook for the Medical and Diagnostics segments, 8% to 9% for Biosciences, and a tax rate of about 26%.

Key risks in the filing include pricing pressure from hospital group purchasing organizations, antitrust suits by direct and indirect purchasers of hypodermic products, a Connecticut antitrust subpoena related to HRDI, a potential competitive threat from an inhaled insulin product, latex glove and needlestick product liability litigation, and a UN Oil-for-Food inquiry involving a French subsidiary. Management believes the litigation has meritorious defenses but acknowledges that outcomes could be material.

02—Key points

Key Highlights

Revenue grew 10% to $5.41 billion, with about 6% from volume, 3% from favorable currency, and under 1% from price; U.S. revenue rose 6% and international revenue rose 13%.
Diluted EPS was $2.77 on reported net income of $722 million, versus $1.77 in 2004. Income from continuing operations was $2.66 per diluted share, versus $2.21, which excludes discontinued Clontech operations.
Operating margin widened to 19.0% from 16.0%, and gross margin rose to 50.8% from 49.3%, supported by growth in safety-engineered devices, pen needles, and higher-margin instruments and reagents.
Segment performance was strong: Medical revenue rose 10% to $2.96 billion, Diagnostics rose 8% to $1.66 billion, and Biosciences rose 11% to $800 million, with Biosciences margins comparable to prior year.
Fiscal 2005 included $70 million of share-based compensation (about $0.19 per diluted share) and a $77 million one-time tax charge (about $0.30 per share) for repatriating foreign earnings, which together reduced EPS by about $0.49.
Financial position remained solid: operating cash flow of $1.22 billion, cash of $1.04 billion, debt-to-capitalization of 27.3%, and about $550 million in share repurchases, with a new 10 million-share authorization approved in November 2005.
Notable legal and regulatory exposures include multiple antitrust class actions over hypodermic products, a Connecticut antitrust subpoena, latex glove and needlestick product liability suits, and a UN Oil-for-Food inquiry involving a French subsidiary.

03—Questions

Frequently Asked Questions

How did BD perform in fiscal 2005 compared with 2004, and what drove the change?
Revenue rose 10% to $5.41 billion. Volume contributed about 6 points, foreign currency about 3 points, and price less than 1 point. Reported net income increased to $722 million from $467 million, but 2004 included a $100 million litigation settlement and $45 million of blood glucose monitoring charges. Fiscal 2005 included $70 million of share-based compensation and a $77 million tax charge tied to repatriation. Income from continuing operations rose to $2.66 per diluted share from $2.21.
What is BD's outlook for fiscal 2006?
Management expects gross margin to improve by 30 to 40 basis points and SSG&A to fall 40 to 50 basis points as a percentage of revenue. R&D is expected to grow about 12%. Segment revenue growth is guided to 5% to 6% for Medical and Diagnostics and 8% to 9% for Biosciences, after a roughly 2% currency headwind. The effective tax rate is expected to be about 26%, capital expenditures about $400 million, and share repurchases about $450 million. Share-based compensation is expected to reduce EPS by about $0.23.
How strong is BD's balance sheet and cash flow position?
BD generated $1.22 billion of operating cash flow from continuing operations, ended the year with $1.04 billion of cash, and reduced debt-to-capitalization to 27.3%. Total debt was about $1.3 billion, with 16% short-term. BD holds an A2/A+ credit rating and has a $900 million undrawn credit facility. It plans to repatriate about $1.3 billion of foreign earnings in 2006 and made a $150 million discretionary U.S. pension contribution in October 2005.
What are the main risks investors should monitor?
Key risks include pricing pressure from hospital group purchasing organizations and healthcare consolidation, and the potential impact of an inhaled insulin product on insulin injection device sales. Antitrust suits from direct and indirect purchasers of hypodermic products, a Connecticut antitrust subpoena, and a Daniels Sharpsmart suit could affect results. Product liability cases involving latex gloves and needlesticks are pending, with a class certification ruling under appeal. A UN Oil-for-Food inquiry involving a French subsidiary is ongoing. Currency swings and raw material and resin costs also pose risk.
Why did BD's reported EPS and income from discontinued operations differ in 2005?
BD sold its Clontech unit on August 31, 2005 for $62 million, recording a $13 million pre-tax gain and $30 million of after-tax income from discontinued operations, about $0.11 per diluted share. In 2004, BD recorded a $116 million after-tax write-down of Clontech, which produced a $0.44 per-share loss. Continuing operations are presented separately, so 2005 diluted EPS of $2.77 reflects the discontinued gain, while $2.66 reflects continuing operations only.

04—Continue

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