01—Abstract
Summary
Summary of the 10-K filed November 25, 2009. Cited figures are marked; the original filing is the authoritative source.
Becton, Dickinson and Company (BD) reported fiscal 2009 (year ended September 30, 2009) revenues of $7.16 billiona, up 1% from $7.07 billion in 2008.
Volume growth of roughly 5% and price gains of less than 1% were largely offset by about 4 points of unfavorable foreign currency translation, net of hedge gains. Operating income rose 7% to $1.65 billionb, and operating margin expanded to 23.0% from 21.7%, helped by favorable currency effects, hedge gains, and tight spending controls. Diluted EPS from continuing operations was $4.92 (total diluted EPS $4.99, up from $4.46), though results absorbed a $45 million antitrust settlement charge and benefited from a $20 million tax benefit.
Net income reached $1.23 billionc. Balance sheet and cash flow remained solid. Operating cash flow was $1.7 billion, flat year over year.
BD issued $750 milliond of new notes in May 2009 to refinance a maturing 7.15% note and to fund a $175 million discretionary pension contribution, which pushed total debt to $1.9 billion and debt-to-capitalization to 26.8% from 18.8%. BD repurchased $550 million of stock and paid $317 million in dividends, and it ended the year with $1.8 billion in cash and short-term investments. Subsequent to year end, BD acquired HandyLab for $275 million to expand its molecular diagnostics offerings in healthcare-associated infections.
Investors should weigh several risks. Pending U.S. healthcare reform could impose an excise tax on medical device makers as early as 2010 and could pressure reimbursement.
Currency volatility, pricing pressure from low-cost Chinese competitors, and weakness in U.S. academic and government research funding affecting BD Biosciences are ongoing concerns. Litigation is also significant, including antitrust class actions with a $45 million direct-purchaser settlement still subject to indirect-purchaser challenges, a $5 million RTI patent verdict that BD plans to appeal, and a Gen-Probe patent suit filed in October 2009.
02—Key points
Key Highlights
- Revenue of $7.16B grew 1% reported, with ~5% volume growth offset by ~4 points of unfavorable FX after hedge gains.
- Operating margin expanded to 23.0% from 21.7%, driven by gross margin improvement to 52.6% (from 51.3%) and selling and administrative expense leverage.
- Diluted EPS from continuing operations of $4.92 (total diluted EPS $4.99, up from $4.46), absorbing a $45M antitrust settlement charge (~$0.11/share) and benefiting from a $20M tax benefit (~$0.08/share).
- Segment performance was mixed: Medical revenue was flat at $3.73B with 29.7% margin, Diagnostics grew 3% to $2.23B with margin up to 27.3%, and Biosciences grew 1% to $1.20B with margin of 30.1%.
- Total debt rose to $1.9B (debt-to-capitalization 26.8% vs. 18.8%) after a May 2009 issuance of $750M in notes, while cash and short-term investments reached about $1.9B.
- Capital returns remained strong: $550M in share repurchases and $317M in dividends, with dividends per share rising to $1.32 from $1.14.
- Post-period HandyLab acquisition for $275M in cash expands BD's molecular diagnostics portfolio in healthcare-associated infections.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Becton Dickinson & Co kept $0.18.
- Revenue$6.99B100.0%
- Cost of revenue−$3.31B47.4%
- Gross profit$3.68B52.6%
- Operating costs−$2.09B29.8%
- Operating income$1.59B22.8%
- Interest, other & tax−$358.1M5.1%
- Net income$1.23B17.6%
Where FY2009 revenue went
$6.99B- Cost of revenue: $3.31B, 47% of revenue
- SG&A: $1.68B, 24% of revenue
- Net income: $1.23B, 18% of revenue
- R&D: $404.6M, 5.8% of revenue
- Interest, other & tax: $358.1M, 5.1% of revenue
Kept 18% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed November 25, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $6.99B$6.90B | +1.3% |
| Cost of Revenue | $3.31B$3.36B | −1.4% |
| Gross Profit | $3.68B$3.54B | +3.8% |
| R&D Expenses | $404.57M— | — |
| SG&A Expenses | $1.68B$1.67B | +0.7% |
| Operating Expenses | $5.40B$5.41B | −0.2% |
| Operating Income | $1.59B$1.49B | +6.8% |
| Interest Expense | $40.39M$36.34M | +11.1% |
| Net Income | $1.23B$1.13B | +9.3% |
| EPS (Basic) | $5.12$4.61 | +11.1% |
| EPS (Diluted) | $4.99$4.46 | +11.9% |
| Shares Outstanding (Basic) | 240.48M244.32M | −1.6% |
| Shares Outstanding (Diluted) | 246.80M252.68M | −2.3% |
05—Questions
Frequently Asked Questions
How did BD's underlying business perform in fiscal 2009 given the weak economy and strong dollar?
Underlying volume grew about 5%, and price was up slightly. Reported revenue growth was only 1% because roughly 4 points of unfavorable currency translation, net of hedge gains, offset the volume gains. Safety-engineered devices grew 4% in the U.S. and 7% internationally, while Biosciences U.S. research spending weakened. Management kept margins up through cost controls and favorable currency effects on gross margin.
Why did BD's debt-to-capitalization ratio rise so sharply?
BD issued $500M of 10-year 5.00% notes and $250M of 30-year 6.00% notes in May 2009. Proceeds repaid a $200M 7.15% note, funded a $175M discretionary pension contribution in October 2009, and supported general corporate purposes. Total debt rose to $1.9B from $1.2B, pushing debt-to-capitalization to 26.8% from 18.8%. Management stated the company retains access to capital and holds AA-/A2 ratings with stable outlooks.
What are the main regulatory and policy risks to BD's earnings?
The most significant is U.S. healthcare reform. Certain proposals would impose an excise tax on medical device manufacturers as early as calendar 2010 and could lower reimbursement levels or reduce procedure volumes. Separately, BD received an FDA warning letter in May 2009 over promotional language for its BD EZ Flu A B test; the FDA indicated satisfaction with the company's corrective actions in July 2009.
What litigation exposure should investors be aware of?
BD faces multiple antitrust class actions (In re Hypodermic Products) with a $45M direct-purchaser settlement, though indirect purchasers have challenged it and a February 2010 hearing is scheduled. A $5M jury verdict in favor of Retractable Technologies (RTI) was rendered on November 9, 2009, and BD plans to appeal. Gen-Probe filed a patent infringement suit in October 2009 over specimen collection products, and a False Claims Act qui tam suit is pending. BD says it has meritorious defenses, but management acknowledges that future charges could have a material adverse effect.
What is the outlook for BD's growth and capital allocation going forward?
Management expects revenue growth over the next three years to come from broad business and geographic expansion and new products with higher margins, particularly in safety-engineered devices and molecular diagnostics. Management believes cash from operations, existing cash, and available credit lines are sufficient to fund 2010 capital expenditures, dividends, and buybacks. About 7.6 million shares remained authorized for repurchase at fiscal year-end, and a roughly $30M per year ERP upgrade is ongoing, with implementation risk disclosed.
06—Continue