| Financial Review |
Becton, Dickinson and Company
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Company Overview
Becton, Dickinson and Company (“BD”) is a medical technology company engaged principally in the manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, life science researchers, clinical laboratories, industry and the general public. Our business consists of 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 independent sales representatives. References to years throughout this discussion relate to our fiscal years, which end 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, investment in research and development, and cash flows.
The results of our strategies are reflected in our fiscal 2006 financial and operational performance. Worldwide revenues in 2006 of $5.8 billion increased 8% from the prior year and reflected estimated volume increases of 8%, an estimated decrease due to unfavorable foreign currency translation of 1%, and estimated price increases of less than 1%. U.S. revenues increased 9% to $2.8 billion. International revenues increased 6% to $3 billion and reflected an estimated unfavorable impact from foreign currency translation of 2 percentage points. 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 9% to $917 million in 2006, compared with $842 million in 2005. International sales of safety-engineered devices grew 19% to $324 million in 2006 compared with $273 million in 2005. In 2007, we expect sales of safety-engineered devices to increase about 7% to 8% in the United States and 18% to 20% internationally.
Income from Continuing Operations was $756 million, or $2.95 per diluted share, in 2006 as compared with $692 million, or $2.66 per diluted share, in 2005. Comparisons of Income from Continuing Operations between 2006 and 2005 are affected by the following significant items that are reflected in our financial results:
2006
- In February 2006, we acquired GeneOhm Sciences, Inc. (“GeneOhm”). In connection with the acquisition, we incurred a pre-tax charge of $53 million, or $.21 per diluted share, for acquired in-process research and development.
- In September 2006, we recorded a pre-tax charge of $63 million, or $.17 per diluted share, associated with our decision to exit the blood glucose monitoring (“BGM”) market.
2005
- We recorded a tax charge of $77 million, or $.30 per diluted share, attributable to the planned repatriation of foreign earnings under the American Jobs Creation Act of 2004.
Our financial position remains strong, with net cash provided by continuing operating activities of approximately $1.1 billion for 2006 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 25.8% at September 30, 2006, from 27.1% at September 30, 2005.
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, economic conditions in the United States and elsewhere, 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. For example, since many of our products are used in essential medical care, demand
for such products tends not to be significantly affected by economic fluctuations. Other factors include the international nature of our business and our ability to meet the needs of the worldwide healthcare industry with cost-effective and innovative products.
In 2006, general inflation did not have a material impact on our overall operations. However, it is possible that general inflation rates will rise in 2007 and beyond, and could have a greater impact on worldwide economies and, consequently, on BD. BD purchases supplies of resins, which are oil-based components used in the manufacture of certain products. During 2006, we continued to experience higher resin purchase costs, primarily due to increases in world oil prices and shortages of resin supply. Such increases did not have a significant impact on our 2006 operating results as we were able to offset them through productivity improvements and other cost reduction programs. Although world oil prices declined slightly toward the latter part of 2006, we do not anticipate a resulting decline in overall resin prices in the near term due to the continued shortage of supply for selected resins. Any further increases in resin purchase costs could impact future operating results.
Our anticipated revenue growth over the next three years is expected to come from the following:
- Business growth and expansion among all segments, and
- Development in each business segment of new products and services that provide increased benefits to patients, health-care workers and researchers.
In February 2006, we acquired all the outstanding stock of GeneOhm Sciences, Inc. GeneOhm develops molecular diagnostic testing for the rapid detection of bacterial organisms, including these known to cause healthcare-associated infections. In connection with the acquisition, we incurred a charge of $53 million for acquired in-process research and development. See Note 3 of the Notes to Consolidated Financial Statements for additional discussion.
In September 2006, we signed a definitive agreement to acquire the 93.5% of the outstanding stock of TriPath Imaging, Inc. (“TriPath”) which we do not currently own, for a cash purchase price of $9.25 per share, or approximately $350 million. TriPath develops, manufactures, markets and sells innovative solutions to improve the clinical management of cancer, including detection, diagnosis, staging and treatment. Following the requisite approval by the TriPath shareholders, as well as the satisfaction of other closing conditions, the acquisition is expected to close by the end of BD’s first fiscal quarter 2007. We expect to record an in-process R&D charge of up to $120 million upon closing of the acquisition. Otherwise, the acquisition is expected to be minimally dilutive to BD’s 2007
earnings. We have not reflected the estimated impact of the acquisition in the 2007 guidance for revenues, gross profit margin and operating expenses, discussed below.
Results of Continuing Operations
Medical Segment
Medical revenues in 2006 of $3.2 billion increased $245 million, or 8%, over 2005, which reflected an estimated impact of unfavorable foreign currency translation of 1 percentage point.
The following is a summary of revenues by organizational unit:
| (millions of dollars) |
2006 |
2005 |
Total
Change |
Estimated
Foreign
Exchange
Impact |
|
| Medical Surgical Systems |
$ |
1,749 |
|
$ |
1,661 |
|
|
5% |
|
|
— |
|
| Diabetes Care |
|
753 |
|
|
674 |
|
|
12% |
|
|
— |
|
| Pharmaceutical Systems |
|
640 |
|
|
563 |
|
|
14% |
|
|
(3% |
) |
| Ophthalmic Systems |
|
62 |
|
|
60 |
|
|
3% |
|
|
(2% |
) |
|
| Total Revenues |
$ |
3,203 |
|
$ |
2,958 |
|
|
8% |
|
|
(1% |
) |
|
*Amounts may not add due to rounding.
Medical revenue growth was driven by the continued conversion to safety-engineered products, which accounted for sales of $613 million, as compared with $571 million in the prior year, reflecting growth of 6% in the United States and 16% internationally. Revenue growth in the Medical Surgical Systems unit of this segment was primarily driven by the growth in safety-engineered products and prefilled flush syringes. Revenue growth in the Pharmaceutical Systems unit was driven by a 26% increase in sales in the United States. The Diabetes Care unit’s revenue growth reflected strong sales of pen needles worldwide. On September 28, 2006, we announced a plan to exit the BGM market. This action will impact our placement of blood glucose meters as well as sales of related test strips, which will continue to be distributed until December 2007. Sales of affected BGM meters and test strips worldwide were $97 million, as compared with $74 million in 2005, and reflect a reserve for estimated sales returns of $5 million associated with the exit decision. The decision to exit the BGM market will not affect other Diabetes Care products, including insulin syringes, pen needles and lancets. See Note 3 of the Notes to Consolidated Financial Statements for further discussion. For 2007, we expect the full year revenue growth for the Medical Segment, on a reported basis, to be about 4% to 5%, which reflects the impact of exiting the BGM market. This estimate does not include any BGM sales made in connection with our commitment to provide test strips until patients find alternative BGM products.
Medical operating income was $768 million, or 24.0% of Medical revenues, in 2006, as compared with $711 million, or 24.0% in 2005. BGM exit costs of $63 million reduced Medical operating income as a percentage of Medical revenues in 2006 by approximately 2 percentage points. The Segment’s gross profit margin in 2006 was unfavorably impacted by $51 million of BGM exit costs, which were partially offset by improvement associated with relatively higher sales growth of products that have higher overall gross profit margins, in particular, safety-engineered products and pen needles, as well as favorable manufacturing efficiencies associated with higher volumes. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Medical revenues in 2006 was slightly lower compared with 2005, primarily due to tight expense controls over base spending, which more than offset $12 million of BGM exit costs. Research and development expense in 2006 increased $10 million, or 10%, reflecting continued investment in the development of new products and platforms.
Diagnostics Segment
Diagnostics revenues in 2006 of $1.8 billion increased $98 million, or 6%, over 2005, which reflected an estimated unfavorable impact of foreign currency translation of about 1 percentage point.
The following is a summary of revenues by organizational unit:
| (millions of dollars) |
2006 |
2005 |
Total
Change |
Foreign
Exchange
Impact |
|
| Preanalytical Systems |
$ |
928 |
|
$ |
855 |
|
|
9% |
|
|
— |
|
| Diagnostic Systems |
|
827 |
|
|
802 |
|
|
3% |
|
|
(1% |
) |
|
| Total Revenues |
$ |
1,755 |
|
$ |
1,657 |
|
|
6% |
|
|
(1% |
) |
|
Revenue growth in the Preanalytical Systems unit was driven by the continued conversion to safety-engineered products, which accounted for sales of $627 million, as compared with $543 million in the prior year. Sales of safety-engineered products reflected growth of 13% in the United States, which benefited from BD Vacutainer Push Button Blood Collection Set conversion activity, and 20% internationally.
The Diagnostic Systems unit experienced solid worldwide sales of its automated diagnostic platforms, including the molecular BD ProbeTec ET, BD BACTEC, and the BD Phoenix Automated Microbiology System. These platforms reported combined incremental sales of $33 million over 2005. Revenues for GeneOhm, which was acquired in February 2006, totaled $8 million. Sales of flu diagnostic tests declined by approximately $11 million in fiscal
2006 compared with 2005 primarily due to a relatively mild flu season in both Japan and the United States. For 2007, we expect the full year revenue growth for the Diagnostics Segment to be about 8%.
Diagnostics operating income was $399 million, or 22.7% of Diagnostics revenues, in 2006, compared with $414 million, or 25.0%, in 2005. Segment operating income for the current year includes the in-process research and development charge of $53 million as well as the operating results of GeneOhm, which in the aggregate, reduced operating income as a percentage of Diagnostics revenues by approximately 5%. The Diagnostics Segment experienced slight gross profit margin improvement reflecting higher prices and productivity, which was substantially offset by the impact of the recently acquired GeneOhm products, which have lower overall gross profit margins, and lower sales growth of flu diagnostic products, which have higher overall gross profit margins. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Diagnostics revenues in 2006 was lower compared with 2005 primarily due to tight controls on spending, which more than offset the incremental GeneOhm expenses. Research and development expense in 2006 increased $62 million, reflecting the in-process research and development charge of $53 million as well as new spending for product development associated with the GeneOhm acquisition.
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