Company Overview
Becton, Dickinson and Company (“BD”) is a medical technology company that serves healthcare institutions, life science researchers, clinical laboratories, industry and the general public. BD manufactures and sells a broad range of medical supplies, devices, laboratory equipment and diagnostic products. Our business is divided into three worldwide business segments–BD Medical (“Medical”), BD Diagnostics (“Diagnostics”) and BD Biosciences (“Biosciences”). Our products are marketed in the United States and internationally through independent distribution channels, directly to end users and by sales representatives. References to years throughout this discussion relate to our fiscal year, which ends on September 30.
BD management operates the business consistent with the following core strategies:
- To increase revenue growth by focusing on products that deliver greater benefits to patients, healthcare workers and researchers;
- To improve operating effectiveness and balance sheet productivity; and,
- To strengthen organizational and associate capabilities in the ever-changing healthcare environment.
In assessing the outcomes of these strategies and BD’s financial condition and operating performance, management generally reviews quarterly forecast data, monthly actual results, segment sales and other similar information. We also consider trends related to certain key financial data, including gross profit margin, selling and administrative expense and cash flows.
The results of our strategies are reflected in our fiscal 2004 financial and operational performance. Revenues in 2004 of $4.9 billion increased 11% from the prior year, which includes the estimated favorable impact of foreign currency translation of 5%. Underlying revenue growth (defined as growth excluding the impact of foreign currency translation) of 6% resulted primarily from volume increases in all segments. For 2005, we expect underlying revenue growth for the full year to be about 7%. International revenue growth of 15% in 2004 was favorably affected by foreign currency translation, primarily the Euro. After excluding the estimated favorable impact of foreign currency translation of 9%, international revenues grew approximately 6%. For a discussion of the financial impact of exchange rate fluctuations and the ways and extent to which we attempt to mitigate such impact, see “Financial Instrument Market Risk” below.
Consistent with our strategy to provide products that deliver greater benefits to healthcare workers, and recognizing the issues surrounding sharps-related injuries, BD has developed a wide array of safety-engineered devices that are designed to reduce the incidence of needlestick injuries and exposure to bloodborne pathogens. These products are offered through our Medical and Diagnostics segments. Sales in the United States of safety-engineered devices grew 13% to $765 million in 2004, compared with $679 million in 2003. International sales of safety-engineered devices were approximately $200 million in 2004. In 2005, we expect U.S. sales of safety-engineered devices to increase about 10% to 11%. We are also anticipating growth of international safety sales in the range of 15% to 20%.
Our financial position remains strong with net cash provided by continuing operations (see discussion below regarding discontinued operations) of approximately $1.1 billion for 2004 and our debt-to-capitalization ratio from continuing operations (total debt as a percentage of the sum of shareholders’ equity, net non-current deferred income tax liabilities and total debt) having improved to 28.1% at September 30, 2004, from 30.4% at September 30, 2003.
Our ability to sustain our long-term growth will depend on a number of factors, including our ability to expand our core business (including geographical expansion), develop innovative new products with higher gross profit margins across our business segments, and continue to improve operating efficiency and organizational effectiveness. Numerous factors can affect our ability to achieve these goals, including without limitation, U.S. and global economic conditions, increased competition and healthcare cost containment initiatives. We believe that there are several important factors relating to our business that tend to reduce the impact on BD of any potential economic or political events in countries in which we do business, including the effects of possible healthcare system reforms. These include the non-discretionary nature of the demand for many of our core products which reduces the impact of economic downturns, our international diversification, and our ability to meet the needs of the worldwide healthcare industry with cost-effective and innovative products.
In 2004, inflation did not have a material impact on our overall operations. However, it is possible that inflation rates will rise in 2005 and beyond, and will have a greater impact on worldwide economies and consequently, the way companies operate. For example, BD currently expends approximately $120 to $150 million per year to purchase supplies of resins, which are oil-based components used in the manufacture of certain BD products. We anticipate that our resin purchase costs will increase during 2005 in part, as a result of recent increases in world oil prices. To offset the potential of increasing costs, we strive to maintain our profit margins through cost reduction programs, productivity improvements and, to a lesser extent, periodic price increases.
Our anticipated revenue growth over the next three years is expected to come from the following:
- Core business growth and expansion, including blood glucose monitoring (“BGM”) products and the continued transition to safety-engineered devices;
- Expanding the sale of our high-quality products around the globe; and
- Development in each business segment of new products and services that provide increased benefits to patients, healthcare workers and researchers.
We are currently in the process of evaluating our internal controls over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002. We have a detailed plan in place and expect to have this process completed by September 30, 2005, as required.
As further discussed below and in Note 18 of the Notes to Consolidated Financial Statements, in September 2004, our Board of Directors approved a plan to sell the Clontech operations, a unit of the Biosciences segment. In connection with this decision, we recorded a pre-tax charge in 2004 of $124 million to write down the net assets of Clontech to fair value in connection with the planned sale. For financial reporting purposes, the operating results of Clontech, including this charge, have been classified as discontinued operations for all periods presented.
Results of Continuing Operations
Medical Segment
Medical revenues in 2004 of $2.7 billion increased 9% over 2003 or 4%, excluding the estimated impact of favorable foreign currency translation of 5%. Revenue growth in the Medical Surgical Systems unit of this segment accounted for approximately 3 points of the underlying growth and included U.S. safety-engineered product sales of $448 million compared with $407 million in the prior year. Revenue growth in the Pharmaceutical Systems unit contributed approximately 1 point of the underlying growth rate. Such revenue growth reflects the adverse impact of customer buying patterns to support product launches in 2003. Revenue growth in the Diabetes Care unit contributed approximately 1 point of the underlying growth. Revenues in this unit included sales of BGM meters, test strips, and related disposables in the United States and Canada of $42 million compared with $15 million in 2003. We expect revenues of BGM products to be about $75 million in 2005. Growth in the Diabetes Care unit was negatively affected by the decline in the home healthcare product area. Revenue growth in the Medical Surgical Systems unit and the Pharmaceutical Systems unit reflected lower sales of BD Bifurcated Needles used in the administration of smallpox vaccines, which were $2 million and $26 million in 2004 and 2003, respectively. For 2005, we expect the full year underlying revenue growth for the Medical Segment to be about 7%.
Medical operating income was $567 million in 2004, which includes $45 million of BGM charges as discussed below, compared with $556 million in 2003. The increase in Medical operating income, excluding the BGM charges, reflected gross profit margin improvement resulting from the continued conversion to safety-engineered devices from conventional products and the benefits of the 2002 manufacturing restructuring program, as discussed in Note 5 of the Notes to Consolidated Financial Statements. Partially offsetting the growth in Medical operating income was higher research and development spending to support several new product initiatives.
Diagnostics Segment
Diagnostics revenues in 2004 of $1.5 billion increased 12% over 2003, or 7% excluding the estimated impact of favorable foreign currency translation of 5%. Revenues in the Preanalytical Systems unit and the Diagnostic Systems unit each contributed about one-half of the underlying revenue growth. Revenues in the Preanalytical Systems unit included U.S. safety-engineered device sales of $317 million compared with $272 million in the prior year. Revenues in the Diagnostic Systems unit reflected strong worldwide sales of respiratory and flu diagnostic tests in Japan and the United States, which on a combined basis resulted in incremental sales of $22 million over 2003. This unit also experienced strong worldwide sales of its molecular diagnostic platform, BD ProbeTec ET, which reported incremental sales of $18 million over 2003, and good worldwide performance in the more traditional infectious disease categories. For 2005, we expect the full year underlying revenue growth for the Diagnostics Segment to be about 6% to 7%.
Diagnostics operating income was $359 million in 2004 compared with $302 million in 2003. This increase reflected gross profit margin improvement resulting from increased sales of products that have higher overall gross profit margins, including safety-engineered products and the BD ProbeTec ET platform.
Biosciences Segment
Biosciences revenues in 2004 of $723 million increased 14% over 2003, or 9% excluding the estimated impact of favorable foreign currency translation of 5%. Revenue growth in the Immunocytometry Systems unit accounted for approximately 7 points of the underlying growth. Revenue growth in that unit was driven by sales of the newly introduced BD FACSCanto and BD FACSArray analyzers and continued strong market acceptance of the BD FACSAria cell sorter, as well as strong growth of cell analysis reagents. For 2005, we expect the full year underlying revenue growth for the Biosciences Segment to be about 7% to 8%.
Biosciences operating income was $156 million in 2004 compared with $101 million in 2003, which included non-cash charges of $27 million, as discussed in the 2003 Compared With 2002 section below. The increase in Biosciences 2004 operating income, excluding the non-cash charges in 2003, was driven by sales growth resulting from new instrument introductions and increased sales of cell analysis reagents, as well as the fact that expenses grew at a lower rate than the revenue growth rate.
Geographic Revenues
On a geographic basis, revenues outside the United States in 2004 increased 15% to $2.5 billion. Excluding the estimated impact of favorable foreign currency translation of 9%, underlying revenue growth outside the United States was 6%. Sales of safety-engineered devices were approximately $200 million in 2004. Revenues in Europe accounted for approximately 3 points of the underlying revenue growth, led by strong sales of immunocytometry systems reagents and instruments as well as prefillable syringes. Revenues in Japan contributed approximately 1 point of the underlying revenue growth, led by strong sales of respiratory and flu diagnostic tests in the Diagnostic Systems unit.
Revenues in the United States in 2004 of $2.4 billion increased 6%, primarily from strong sales of safety-engineered devices and prefillable syringes. Sales in the Diabetes Care unit included $40 million related to BGM meters, test strips and related disposables. The Diagnostic Systems unit reported incremental sales of $10 million over 2003 of the BD ProbeTec ET in the United States.
BGM Charges
We recorded a pre-tax charge of $45 million to cost of products sold in 2004 related to our BGM products. The charge included a reserve of $6 million in connection with the voluntary product recall of certain lots of BGM test strips and the write-off of $30 million of certain test strip inventories. In addition, the charge reflected our decision to focus sales and marketing efforts on the BD Logic and Paradigm Link® blood glucose meters in the United States and to discontinue support of the BD Latitude system product offering in the United States, which decision resulted in a write-off of $9 million of related blood glucose meters and fixed assets. See Note 20 of the Notes to Consolidated Financial Statements for further discussion.
Gross Profit Margin
Gross profit margin was 49.3% in 2004 compared with 48.5% in 2003. Excluding the 2004 BGM charges discussed above and the 2003 non-cash charges, as discussed below, the increase in gross profit margin primarily reflected increased sales of products with higher gross profit margins, including safety-engineered products, BGM products and the BD ProbeTec ET instrument platform. In addition, gross profit margin benefited from approximately $15 million of savings achieved from the 2002 Medical restructuring plan.
Operating Expenses
Selling and administrative expense (“SSG&A”) of $1.3 billion in 2004 was 26.6% of revenues, compared to $1.2 billion in 2003, or 26.5% of revenues. This increase was primarily the result of increased investment in various strategic initiatives, in particular, blood glucose monitoring products, as well as a weaker U.S. dollar. In 2005, SSG&A as a percentage of revenues is expected to decrease by 75 to 100 basis points.
Research and development (“R&D”) in 2004 was $236 million, or 4.8% of revenues, compared with $224 million, or 5% of revenues, in 2003. Substantially all R&D efforts are in the United States and therefore are not impacted by foreign currency translation. However, the revenue increase attributable to foreign currency translation had the effect of decreasing R&D expenses as a percentage of sales. In 2005, we expect our year on year investment in R&D to grow 12% to 15%.
The litigation settlement of $100 million in 2004, as discussed in Note 17 of the Notes to Consolidated Financial Statements, related to the pre-tax charge to record the settlement of the litigation brought by Retractable Technologies, Inc.
Operating margin in 2004 was 16% of revenues, compared with 17.1% in 2003. Operating income of $787 million in 2004 included the $45 million of BGM charges and the $100 million litigation settlement, both discussed earlier. Operating income in 2003 of $761 million included $27 million of non-cash charges, as discussed in the 2003 Compared With 2002 section below.
Non-Operating Income and Expenses
Net interest expense was $30 million in 2004, compared with $37 million in 2003. This decrease was due primarily to interest income arising from tax refunds received in connection with the conclusion of certain tax examinations during 2004, as well as higher levels of interest-bearing investments.
Other expense, net was $5 million in 2004, primarily related to the write down of investments. Other expense, net of $3 million in 2003 consisted of write downs of investments and intangible assets of $5 million, which were partially offset by foreign exchange gains of $2 million.
|
