How did BD perform financially in fiscal 2006?

Revenue rose 8% to $5.83 billion, net income reached $752 million, and diluted EPS was $2.93. Operating margin was 18.0% reported and 19.7% adjusted for the BGM exit charge, GeneOhm in-process R&D, and an insurance settlement gain. Gross margin was 50.5%, down slightly from 50.8% in 2005, because of the BGM charges.

What was the blood glucose monitoring exit, and what does it cost BD?

On September 28, 2006, BD announced it would exit the BGM market and discontinued the BD Logic meter. It recorded a $63 million pre-tax charge, or about $0.17 per diluted share, covering sales returns, inventory and purchase commitment write-offs, asset write-downs, and severance. BD will keep distributing test strips through December 2007, and the exit is expected to lift 2007 reported gross margin and reduce S&A as a percentage of revenue.

What are the main legal and regulatory risks?

BD faces five direct-purchaser and three indirect-purchaser antitrust class actions over hypodermic products, now consolidated in federal MDL proceedings in New Jersey, plus suits alleging exclusionary contracts in sharps collection and home-use insulin syringes. It also faces needlestick and latex glove product liability cases, and state AG subpoenas tied to its HRDI membership. In November 2006 the FDA issued a warning letter on its San Lorenzo, Puerto Rico blood collection facility, and BD is preparing a response. The filing says that any future charges could be material.

What is the outlook for 2007 and what is the TriPath acquisition?

For 2007, BD guided to Medical segment revenue growth of about 4% to 5% (reflecting the BGM exit), Diagnostics and Biosciences growth of about 8%, gross margin expansion of about 140 basis points, R&D of $345 to $350 million, and an effective tax rate near 27%. BD agreed to buy the 93.5% of TriPath Imaging it does not own for about $350 million in cash, at $9.25 per share. The deal is expected to close by the end of fiscal Q1 2007, carry an in-process R&D charge of up to $120 million, and be minimally dilutive to 2007 earnings. The guidance excludes TriPath.

How exposed is BD to foreign currency and international markets?

More than half of fiscal 2006 revenue came from outside the U.S., about $3 billion, and currency translation reduced growth by roughly 2 points in international markets and 1 point overall. BD uses forward contracts and options to hedge transactional exposures. A 10% U.S. dollar appreciation would raise pre-tax earnings by about $68 million on the derivatives outstanding at year-end, while a 10% depreciation would lower them by about $3 million. The company also cites political, trade, and capital-transfer risks in certain countries.

BDX 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 30, 2006. Cited figures are marked; the original filing is the authoritative source.

Becton, Dickinson and Company (BD) closed fiscal 2006 (ended September 30, 2006) with revenue of $5.83 billion^a, up 8% year over year, driven by estimated volume growth of 8%.

Net income was $752 million^b, or $2.93 diluted EPS, versus $2.77 in 2005. Income from continuing operations was $756 million, or $2.95 per diluted share. Those results include two significant charges: a $63 million pre-tax charge to exit the blood glucose monitoring (BGM) market and a $53 million in-process R&D charge tied to the GeneOhm acquisition.

Excluding these items and a $17 million^c insurance settlement gain, management's adjusted operating income rose about 12% to $1.15 billion, with adjusted operating margin of 19.7%. BD's balance sheet and cash generation remain solid. Operating cash flow from continuing operations was $1.08 billion, capital expenditures rose to $459 million, and the company repurchased $449 million of stock.

The debt-to-capitalization ratio improved to 25.8%^d from 27.1%, and the company holds A2/A+ credit ratings. Management guided to roughly 140 basis points of reported gross margin expansion and 80 to 100 basis points of selling and administrative leverage in 2007, and expects revenue growth of roughly 4% to 5% in Medical and about 8% in both Diagnostics and Biosciences.

The main risks flagged in the filing are the pending antitrust class actions (including the MDL over hypodermic products and new suits over sharps collection and insulin syringes), product liability suits, a November 2006 FDA warning letter for the San Lorenzo, Puerto Rico blood collection facility, and foreign currency exposure, since over half of revenue comes from international operations. The planned $350 million acquisition of TriPath Imaging, expected to close by the end of fiscal Q1 2007 with an in-process R&D charge of up to $120 million, is also a near-term item for investors.

02—Key points

Key Highlights

Revenue grew 8% to $5.83 billion in FY2006, with estimated volume growth of 8% and U.S. sales up 9% to $2.8 billion.
Diluted EPS was $2.93 on net income of $752 million; income from continuing operations was $2.95 per diluted share, versus $2.77 and $2.66 in FY2005.
Adjusted operating income rose about 12% to $1.15 billion (19.7% of adjusted revenue), excluding the $63 million BGM exit charge, $53 million GeneOhm in-process R&D, and a $17 million insurance gain.
Safety-engineered devices grew to $1.24 billion combined (U.S. $917 million, up 9%; international $324 million, up 19%), supporting the company's core strategy.
Balance sheet strengthened: debt-to-capitalization fell to 25.8% from 27.1%, operating cash flow was $1.08 billion, and the company bought back $449 million of stock.
2007 guidance calls for about 140 basis points of gross margin expansion, 80 to 100 basis points of S&A leverage, roughly 27% tax rate, and capex of $600 to $650 million.
Risk items include ongoing antitrust class actions (In re Hypodermic Products MDL), a November 2006 FDA warning letter for the Puerto Rico blood collection plant, and a pending $350 million TriPath Imaging acquisition.

03—Questions

Frequently Asked Questions

How did BD perform financially in fiscal 2006?
Revenue rose 8% to $5.83 billion, net income reached $752 million, and diluted EPS was $2.93. Operating margin was 18.0% reported and 19.7% adjusted for the BGM exit charge, GeneOhm in-process R&D, and an insurance settlement gain. Gross margin was 50.5%, down slightly from 50.8% in 2005, because of the BGM charges.
What was the blood glucose monitoring exit, and what does it cost BD?
On September 28, 2006, BD announced it would exit the BGM market and discontinued the BD Logic meter. It recorded a $63 million pre-tax charge, or about $0.17 per diluted share, covering sales returns, inventory and purchase commitment write-offs, asset write-downs, and severance. BD will keep distributing test strips through December 2007, and the exit is expected to lift 2007 reported gross margin and reduce S&A as a percentage of revenue.
What are the main legal and regulatory risks?
BD faces five direct-purchaser and three indirect-purchaser antitrust class actions over hypodermic products, now consolidated in federal MDL proceedings in New Jersey, plus suits alleging exclusionary contracts in sharps collection and home-use insulin syringes. It also faces needlestick and latex glove product liability cases, and state AG subpoenas tied to its HRDI membership. In November 2006 the FDA issued a warning letter on its San Lorenzo, Puerto Rico blood collection facility, and BD is preparing a response. The filing says that any future charges could be material.
What is the outlook for 2007 and what is the TriPath acquisition?
For 2007, BD guided to Medical segment revenue growth of about 4% to 5% (reflecting the BGM exit), Diagnostics and Biosciences growth of about 8%, gross margin expansion of about 140 basis points, R&D of $345 to $350 million, and an effective tax rate near 27%. BD agreed to buy the 93.5% of TriPath Imaging it does not own for about $350 million in cash, at $9.25 per share. The deal is expected to close by the end of fiscal Q1 2007, carry an in-process R&D charge of up to $120 million, and be minimally dilutive to 2007 earnings. The guidance excludes TriPath.
How exposed is BD to foreign currency and international markets?
More than half of fiscal 2006 revenue came from outside the U.S., about $3 billion, and currency translation reduced growth by roughly 2 points in international markets and 1 point overall. BD uses forward contracts and options to hedge transactional exposures. A 10% U.S. dollar appreciation would raise pre-tax earnings by about $68 million on the derivatives outstanding at year-end, while a 10% depreciation would lower them by about $3 million. The company also cites political, trade, and capital-transfer risks in certain countries.

04—Continue

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