Financial Review

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 2005 financial and operational performance. Worldwide revenues in 2005 of $5.4 billion increased 10% from the prior year and reflected estimated volume increases of 6%, an estimated increase due to favorable foreign currency translation of 3%, and estimated price increases of less than 1%. U.S. revenues increased 6% to $2.6 billion. International revenues increased 13% to $2.8 billion. 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 $842 million in 2005, compared with $775 million in 2004. International sales of safety-engineered devices were approximately $273 million in 2005 compared with $203 million in 2004. In 2006, we expect U.S. sales of safety-engineered devices to increase about 8%. We are also anticipating growth of international safety sales of about 20%.

     Income from Continuing Operations was $692 million, or $2.66 per diluted share, in 2005 as compared with $583 million, or $2.21 per diluted share, in 2004. Comparisons of Income from Continuing Operations between 2005 and 2004 are affected by the following significant items that are reflected in our financial results:

2005

• We recorded share-based compensation expense of $70 million ($50 million after taxes), or $.19 per diluted share, in connection with the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123 (R)”). Prior periods were not restated.
  
• We recorded a one-time 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.
  

2004

• We recorded a charge of $100 million ($63 million after taxes), or $.24 per diluted share, related to a litigation settlement.
  
• We recorded a charge of $45 million ($28 million after taxes), or $.11 per diluted share, related to the voluntary recall and writeoff of certain blood glucose strip inventory and other actions taken with respect to our blood glucose monitoring (“BGM”) products.
  

     Our financial position remains strong with net cash provided by continuing operating activities of approximately $1.2 billion for 2005 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 27.3% at September 30, 2005, from 28.1% at September 30, 2004.

     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 2005, general inflation did not have a material impact on our overall operations. However, it is possible that general inflation rates will rise in 2006 and beyond, and could have a greater impact on worldwide economies and consequently, on BD. In 2005, we experienced higher resin purchase costs, primarily due to recent increases in world oil prices and shortages of supply. BD currently expends approximately $150 to $170 million per year to purchase supplies of resins, which are oil-based components used in the manufacture of certain BD products. However, we continue to strive to improve our profit margins through increased sales of products with higher margins, cost reduction programs, productivity improvements and, to a lesser extent, periodic price increases and adjustments. For example, in 2006, we expect our gross profit margin to improve by 30 to 40 basis points over 2005.

     Our anticipated revenue growth over the next three years is expected to come from the following:

• Core business growth and expansion;
  
• 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.
  

Accounting Change
Effective October 1, 2004, we adopted SFAS No. 123 (R). This statement requires compensation cost relating to share-based payment transactions to be recognized in net income using a fair-value measurement method. In November 2004, equity-based awards were granted to employees under a new long-term incentive program, which consisted of stock options and restricted stock awards. See Note 13 of the Notes Consolidated Financial Statements for a discussion of the valuation methodology used in estimating the fair value of these equity-based awards.

     In previous years, we had used stock options as our primary form of incentive compensation and such stock options were accounted for under the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” This method measured share-based compensation expense as the amount by which the market price of the stock on the date of grant exceeded the exercise price. Under APB No. 25, no share-based compensation expense was recognized for stock options since the exercise price equaled the market price of the underlying stock on the date of grant. We elected the modified prospective transition method for adopting SFAS No. 123(R) and therefore, prior periods were not restated. Under this method, the provisions of SFAS No. 123(R) were applied to new awards granted after the time of adoption, as well as to the unvested portion of previously granted equity-based awards for which the requisite service had not been rendered as of October 1, 2004. See Note 2 of the Notes to Consolidated Financial Statements for additional discussion.

     As a result of the adoption of SFAS No. 123(R) and the granting of restricted stock unit awards in November 2004, we recorded share-based compensation expense in 2005 as follows:

(millions of dollars)	2005
Selling and administrative expense	$	54
Cost of products sold		10
Research and development expense		6
Total	$	70

     Share-based compensation expense was recorded in corporate unallocated expense for segment reporting purposes. For 2006, we estimate share-based compensation expense will reduce diluted earnings per share from continuing operations by about $.23, as compared with $.19 in 2005.

Results of Continuing Operations

Medical Segment
Medical revenues in 2005 of $3.0 billion increased $278 million, or 10%, over 2004, which includes an estimated impact of favorable foreign currency translation of 3%.

     The following is a summary of revenues by organizational unit:

(millions of dollars)	2005			2004			Total Change			Foreign Exchange Impact
Medical Surgical Systems	$	1,661		$	1,541			8%			3%
Diabetes Care		674			586			15%			2%
Pharmaceutical Systems		563			497			13%			4%
Ophthalmic Systems		60			56			7%			3%
Total Revenues	$	2,958		$	2,680			10%			3%

     Medical revenues reflect the continued conversion in the United States to safety-engineered products, which accounted for sales of $490 million, as compared with $459 million in the prior year. Included in Medical revenues were international sales of safety-engineered products of $81 million, as compared with $63 million in the prior year. 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. The Diabetes Care unit’s revenue growth reflected strong sales of BGM products in the United States and pen needles worldwide. Sales of BGM meters, test strips and related disposables in the United States and Canada were $76 million, as compared with $42 million in 2004. BGM products were introduced into the European market through the launch in Germany during the fourth quarter of 2005. We expect revenues of BGM products to be about $115 million in 2006. Revenue growth in the Pharmaceutical Systems unit was primarily attributable to a 19% increase in international sales. For 2006, we expect the full year revenue growth for the Medical Segment to be about 5% to 6%, which includes an estimated unfavorable impact of foreign currency of about 2%.

     Medical operating income was $711 million, or 24.0% of Medical revenues, in 2005, as compared with $567 million, or 21.1% in 2004, which included $45 million of BGM charges as further discussed below. Operating income as a percentage of revenues reflects gross margin improvement from increased sales of products that have higher overall gross profit margins, in particular, safety-engineered products and pen needles. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percent of Medical revenues in 2005 was slightly lower compared with 2004, primarily due to the favorable effects from a weaker U.S. dollar along with tight controls on base spending. Incremental investments to support the BGM initiative were about $14 million. Research and development expenses in 2005 increased $14 million, or 17%, reflecting continued investment in the development of new products.

Diagnostics Segment
Diagnostics revenues in 2005 of $1.7 billion increased $125 million, or 8%, over 2004, which includes an estimated favorable impact of foreign currency translation of 2%.

     The following is a summary of revenues by organizational unit:

(millions of dollars)	2005			2004			Total Change			Foreign Exchange Impact
Preanalytical Systems	$	855		$	788			8%			2%
Diagnostic Systems		802			744			8%			2%
Total Revenues	$	1,657		$	1,532			8%			2%

     Revenue growth in the Preanalytical Systems unit reflected the continued conversion in the United States to safety-engineered products and accounted for sales of $352 million, compared with $317 million in 2004. Sales of the
BD Vacutainer Push Button Collection Sets were key to this trend. Preanalytical Systems revenues included international sales of safety-engineered products of $192 million, compared with $140 million in 2004. Geographic expansion in the Middle East and Asia Pacific regions, particularly in China, also contributed to the growth in the Preanalytical Systems unit. The Diagnostic Systems unit experienced solid worldwide sales of its automated diagnostic platforms, including the molecular
BD ProbeTec ET, and the BD Phoenix Automated Microbiology System. These platforms reported combined incremental sales of $17 million over 2004. For 2006, we expect the full year revenue growth for the Diagnostics Segment to be about 5% to 6%, which includes an estimated unfavorable impact of foreign currency of about 2%.

     Diagnostics operating income was $414 million, or 25.0% of Diagnostics revenues, in 2005, compared with $359 million, or 23.5%, in 2004. The increase in operating income as a percentage of revenues reflects gross profit improvement from increased sales of products that have higher overall gross profit margins, in particular, safety-engineered products and the
BD ProbeTec ET platform. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percent of Diagnostics revenues in 2005 was slightly lower compared with 2004 primarily due to the favorable impact from a weaker U.S. dollar along with tight controls on spending. Research and development expenses in 2005 increased $6 million, or 8%, reflecting spending on new programs, and were partially offset by lower spending of $3 million, as a result of the completion of our cancer biomarker discovery program in 2004.