Segment operating income for the first quarter was $79 million, or 28.7% of Biosciences revenues, compared with $56 million, or 24.1%, in the prior year’s quarter. Gross profit margin as a percentage of revenues increased due to improved production efficiencies, as well as increased sales of products with higher margins. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Biosciences revenues for the quarter decreased compared with the prior year’s quarter, as a result of continued spending controls. Research and development spending in the quarter increased $1.5 million, or 8.4%, reflecting increased investment in new product development.
Gross profit margin was 51.4% for the first quarter, compared with 52.8% for the comparable prior year period. Gross profit margin in the first quarter of 2008 as compared with the prior year’s period reflected an estimated 0.7% unfavorable impact of foreign currency translation and an estimated 0.4% of increased resin and steel costs, as well as manufacturing start-up costs. Increased sales of products with relatively higher margins and productivity gains were more than offset by, among other things, asset write-offs, resulting in an estimated net unfavorable impact of 0.3%. We expect gross profit margin to decrease by about 20 basis points in 2008. Increased resin and steel costs as well as manufacturing start-up costs in 2008 are anticipated to offset expected improvements.
Selling and administrative expense was 24.7% of revenues for the first quarter, compared with 25.6% for the prior year’s period. Aggregate expenses for the current period reflect increases in base spending of $11 million and in expenses associated with TriPath operations of $8 million, as well as an unfavorable foreign exchange impact of $19 million. Selling and administrative expense as a percentage of revenues is expected to decrease by about 70 basis points in 2008.
Research and development expense of $92 million for the first quarter increased 14%, compared with the prior year’s amount of $80 million. The increase in research and development expenditures reflect increased spending for new programs in each of our segments for the three-month period ended 2008. We anticipate Research and development expense to increase by about 11% for 2008.
Interest income was $14 million in the first quarter, compared with $16 million in the prior year’s period, resulting from lower cash balances. Interest expense was $10 million in the first quarter, compared with $13 million in the prior year’s period, which reflects lower debt and higher levels of capitalized interest.
The income tax rate was 26.1% for the first quarter, compared with the prior year’s rate of 39.0% . The prior year’s rate reflected the non-deductibility of the acquired in-process research and development charges associated with the TriPath acquisition, which was partially offset by the impact of approximately 2.0% resulting from the retroactive reinstatement of the research and experimentation tax credit. The Company expects the reported tax rate for 2008 to be slightly above 27%.
Income from Continuing Operations and Diluted Earnings Per Share from Continuing Operations
Income from continuing operations and diluted earnings per share from continuing operations for the first quarter of 2008 were $271 million and $1.07, respectively. Income from continuing operations and diluted earnings per share from continuing operations for the prior year’s first quarter were $131 million and 51 cents, respectively. The prior year’s period reflected the acquired in-process research and development charge associated with the TriPath acquisition of $115 million or 45 cents per share.
Liquidity and Capital Resources
Net cash provided by continuing operating activities, which continues to be our primary source of funds to finance operating needs and capital expenditures, was $473 million during the first quarter of 2008, compared with $276 million in the same period in 2007. Net cash provided by continuing operations in the first quarters of the current and prior year was reduced by changes in the pension obligation, resulting primarily from discretionary cash contributions of approximately $23 million and $75 million, respectively.
Net cash used for continuing investing activities for the first quarter of the current year was $139 million, compared with $450 million in the prior year period. The prior year amount reflects the payment of $340 million of net cash for the TriPath acquisition. Capital expenditures were $121 million in the first three months of 2008 and $111 million in the same period in 2007. We expect capital spending for 2008 to be about $650 million.
Net cash used for continuing financing activities for the first quarter of the current year was $101 million, compared with $306 million in the prior year period. As of December 31, 2007, total debt of $1.2 billion represented 20.4% of total capital (shareholders' equity, net non-current deferred income tax liabilities, and debt), versus 20.9% at September 30, 2007. Short-term debt was 18% of total debt at the end of December 31, 2007 and September 30, 2007, respectively. Issuance of common stock is net of cash outflows resulting from share repurchases to satisfy minimum tax withholding on share-based compensation vested or exercised.
For the first quarter of the current year, the Company repurchased $123 million of its common stock, compared with approximately $112 million of its common stock in the prior year period. At December 31, 2007, authorization to repurchase an additional 9.6 million common shares remained.
We have in place a commercial paper borrowing program that is available to meet our short-term financing needs, including working capital requirements. Borrowings outstanding under this program were $200 million at December 31, 2007. During the first quarter of 2008, we amended our syndicated credit facility to extend the expiration date from December 2011 to December 2012. This credit facility, under which there were no borrowings outstanding at December 31, 2007, provides backup support for our commercial paper program and can also be used for other general corporate purposes. This credit facility includes a single financial covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio has ranged from 17-to-1 to 26-to-1. In addition, we have informal lines of credit outside the United States.
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Contractual Obligations
The contractual obligations table as of September 30, 2007, included in the “Financial Review” section of our 2007 Annual Report, did not reflect amounts associated with uncertain tax positions. As a result of the adoption on October 1, 2007 of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (see Note 2 to the Condensed Consolidated Financial Statements), our year-end disclosure of contractual obligations will now include information concerning uncertain tax positions. As of December 31, 2007, there have been no significant changes in our contractual obligations.
Cautionary Statement Regarding Forward-Looking Statements
BD and its representatives may from time-to-time make certain forward-looking statements in publicly released material, both written and oral, including statements contained in this report and filings with the Securities and Exchange Commission (“SEC”) and in our other reports to shareholders. Forward-looking statements may be identified by the use of words like “plan,” “expect,” “believe,” “intend,” “will,” “anticipate,” “estimate” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance, as well as our strategy for growth, product development, regulatory approvals, market position and expenditures. All statements that address operating performance or events or developments that we expect or anticipate will occur in the future -- including statements relating to volume growth, sales and earnings per share growth, and statements expressing views about future operating results -- are forward-looking.
Forward-looking statements are based on current expectations of future events. The forward-looking statements, are and will be, based on management's then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events and developments or otherwise.
The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements:
Regional, national and foreign economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates, and the potential effect of such fluctuations on revenues, expenses and resulting margins, as well as on competition in certain markets.
Fluctuations in the cost and availability of oil-based resins and other raw materials and the ability to maintain favorable supplier arrangements and relationships (particularly with respect to sole-source suppliers) and the potential adverse effects of any disruption in the availability of such raw materials.
We operate in a highly competitive environment. New product introductions by our current or future competitors (for example, new forms of drug delivery) could adversely affect our ability to compete in the global market. Patents attained by competitors, particularly as patents on our products expire, may also adversely impact our competitive position. Certain competitors have established manufacturing sites or have contracted with suppliers in low- cost manufacturing locations as a means to lower their costs. New entrants may also appear.
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Changes in domestic and foreign healthcare industry practices and regulations resulting in increased pricing pressures, including the continued consolidation among healthcare providers; trends toward managed care and healthcare cost containment; and government laws and regulations relating to sales and promotion, reimbursement and pricing generally.
The effects, if any, of governmental and media activities regarding the business practices of group purchasing organizations, which negotiate product prices on behalf of their member hospitals with BD and other suppliers.
Our ability to obtain the anticipated benefits of any restructuring programs, if any, that we may undertake.
Adoption of, or changes, in government laws and regulations affecting domestic and foreign operations, including those relating to trade, monetary and fiscal policies, taxation, environmental matters, sales practices, price controls, licensing and regulatory approval of new products, regulatory requirements for products in the postmarketing phase, or changes in enforcement practices with respect to any such laws and regulations. In particular, environmental laws, particularly with respect to the emission of greenhouse gases, are becoming more stringent throughout the world, which may increase our costs of operations or necessitate changes in our manufacturing plants or processes.
Fluctuations in U.S. and international governmental funding and policies for life science research.
Difficulties inherent in product development, including the potential inability to successfully continue technological innovation, complete clinical trials, obtain regulatory approvals in the United States and abroad, obtain coverage and adequate reimbursement for new products, or gain and maintain market approval of products, as well as the possibility of encountering infringement claims by competitors with respect to patent or other intellectual property rights, all of which can preclude or delay commercialization of a product.
Pending and potential litigation or other proceedings adverse to BD, including antitrust claims, product liability claims, and patent infringement claims and the availability or collectibility of insurance.
The effects, if any, of adverse media exposure or other publicity regarding BD’s business or operations.
Our ability to achieve earnings forecasts, which are generated based on projected volumes and sales of many product types, some of which are more profitable than others. There can be no assurance that we will achieve the projected level or mix of product sales.
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The effect of market fluctuations on the value of assets in BD’s pension plans and the possibility that BD may need to make additional contributions to the plans as a result of any decline in the value of such assets.
Our ability to effect infrastructure enhancements and incorporate new systems technologies into our operations.
Product efficacy or safety concerns resulting in product recalls, regulatory action on the part of the U.S. Food and Drug Administration (or foreign counterparts) or declining sales.
Economic and political conditions in international markets, including civil unrest, terrorist activity, governmental changes, restrictions on the ability to transfer capital across borders and expropriation of assets by a government.
The effects of natural disasters, including hurricanes or pandemic diseases, on our ability to manufacture our products, particularly where production of a product line is concentrated in one or more plants, or on our ability to source components from suppliers that are needed for such manufacturing.
Our ability to penetrate developing and emerging markets, which also depends on economic and political conditions, and how well we are able to acquire or form strategic business alliances with local companies and make necessary infrastructure enhancements to production facilities, distribution networks, sales equipment and technology.
The impact of business combinations, including acquisitions and divestitures, both internally on BD and externally on the healthcare industry.
Issuance of new or revised accounting standards by the Financial Accounting Standards Board or the SEC.
The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in information reported since the end of the fiscal year ended September 30, 2007.
Item 4. Controls and Procedures
An evaluation was carried out by BD’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of BD’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2007. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were, as of the end of the period covered by this report, effective. There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings We are involved, both as a plaintiff and a defendant, in various legal proceedings which arise in the ordinary course of business, including product liability and environmental matters as set forth in our 2007 Annual Report on Form 10-K. Since September 30, 2007, the following developments have occurred with respect to the legal proceedings in which we are involved: In July 2007, BD received notice of a suit instituted in Saudi Arabia by El Seif Development (“El Seif”), a former BD distributor (Case No. 7516, Board of Grievances, Saudi Arabia). El Seif sought monetary damages arising out of the termination of its distributor agreement and other contractual arrangements with BD. This matter has been settled on terms that are not material to BD. In January 2008, the court inRetractable Technologies, Inc. vs. Becton Dickinson and Company (Civil Action No. 2:07-cv-250, U.S. District Court, Eastern District of Texas) granted BD’s motion to sever the plaintiff’s patent and non-patent claims into separate cases. Summary Given the uncertain nature of litigation generally, BD is not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which BD is a party. In accordance with U.S. generally accepted accounting principles, BD establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). In view of the uncertainties of litigation, BD could incur charges in excess of any currently established accruals and, to the extent available, excess liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on BD’s consolidated results of operations and consolidated cash flows. |
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| Item 1A. | Risk Factors |
| | |
| | There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our Annual Report on Form 10-K for the 2007 fiscal year. |
| |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| | |
| | The table below sets forth certain information regarding our purchases of common stock of BD during the quarter ended December 31, 2007. |
| | |
Issuer Purchases of Equity Securities
For the three months ended
December 31, 2007 | Total Number of
Shares Purchased
(1) | Average Price
Paid per
Share | Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (2) | Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (2) |
| October 1 – 31, 2007 | 1,659 | $82.51 | - | 11,111,814 |
| November 1 – 30, 2007 | 1,502,704 | $81.83 | 1,500,000 | 9,611,814 |
| December 1 – 31, 2007 | 13,012 | $83.23 | - | 9,611,814 |
| Total | 1,517,375 | $81.85 | 1,500,000 | 9,611,814 |
| | (1) | Includes 3,015 shares purchased during the quarter in open market transactions by the trustee under BD’s Deferred Compensation Plan and 1996 Directors’ Deferral Plan, and 14,360 shares delivered to BD in connection with stock option exercises. |
| |
| | (2) | Repurchases of 1,111,814 were made pursuant to a repurchase program for 10 million shares announced on November 22, 2005. The remaining repurchases of were made pursuant to a repurchase program covering 10 million shares authorized by the Board of Directors of BD (the “Board”) on July 24, 2007 (the “2007 Program”). There is no expiration date for the 2007 Program. |
| |
| Item 3. | Defaults Upon Senior Securities |
| | |
| | Not applicable. |
| |
| Item 4. | Submission of Matters to a Vote of Security Holders |
| | |
| | There were no matters submitted to a vote of security holders during the fiscal quarter ended December 31, 2007. |
| | |
| | Our Annual Meeting of Shareholders was held on January 29, 2008, at which the following matters were voted upon: |
| | |
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| | i.) | A management proposal for the election of five directors for the terms indicated below was voted upon as follows: |
| |
| | | | | | Votes | |
| Nominee | | Term | | For Votes | | Withheld | |
| Basil L. Anderson | | 3 Years | | 217,003,936 | | 4,546,941 |
| Marshall O. Larsen | | 3 Years | | 216,687,878 | | 4,862,999 |
| Gary A. Mecklenburg | | 3 Years | | 217,243,382 | | 4,307,495 |
| Cathy E. Minehan | | 3 Years | | 167,485,929 | | 54,064,948 |
| Alfred Sommer | | 3 Years | | 190,608,193 | | 30,942,684 |
| | | The directors whose term of office as a director continued after the meeting are: Henry P. Becton, Jr., Edward F. DeGraan, Claire M. Fraser-Liggett, Edward J. Ludwig, Adel A.F. Mahmoud, James F. Orr, Willard J. Overlock, Jr. and Bertram L. Scott. |
| |
| | ii.) | A management proposal to ratify the selection of Ernst & Young, LLP as independent registered public accounting firm for the fiscal year ending September 30, 2008 was voted upon. 217,209,892 shares were voted for the proposal, 2,534,609 shares were voted against, and 1,806,376 shares abstained. |
| |
| | iii.) | A shareholder proposal requesting that the Board of Directors take the necessary steps to provide for the annual election of directors was voted upon. 165,660,344 shares were voted for the proposal, 33,089,524 shares were voted against, 2,561,047 shares abstained, and there were 20,239,961 broker non-votes. |
| |
| | iv.) | A shareholder proposal requesting that the Board of Directors take the necessary steps to provide for cumulative voting in the election of directors was voted upon. 71,175,797 shares were voted for the proposal, 127,873,513 shares were voted against, 2,261,605 shares abstained, and there were 20,239,961 broker non-votes. |
| |
| | v.) | A shareholder proposal requesting that the Company provide an environmental report was voted upon. 53,282,419 shares were voted for the proposal, 94,125,388 shares were voted against, 53,903,109 shares abstained, and there were 20,239,961 broker non-votes. |
| |
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| Item 5. | Other Information |
| | |
| | Not applicable. |
| | |
| Item 6. | Exhibits |
| | |
| | Exhibit 10(d)(i) | Deferred Compensation Plan, as amended and restated as of December 31, 2007. |
| | | |
| | Exhibit 10(d)(ii) | 1996 Directors’ Deferral Plan, as amended and restated as of December 31, 2007. |
| | | |
| | Exhibit 10(r) | Amended and Restated Five-Year Credit Agreement, dated as of December 1, 2006 among the registrant and the banks named therein. |
| | | |
| | Exhibit 31 | Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to SEC Rule 13a - 14(a). |
| | | |
| | Exhibit 32 | Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a - 14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | Becton, Dickinson and Company |
| | | (Registrant) |
| |
| Dated: February 4, 2008 | | |
| |
| |
| |
| | | /s/ John R. Considine |
| | | John R. Considine |
| | | Senior Executive Vice President and |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |
| |
| |
| |
| |
| | | /s/ William A. Tozzi |
| | | William A. Tozzi |
| | | Vice President - Finance |
| | | (Chief Accounting Officer) |
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INDEX TO EXHIBITS
| Exhibit Number | | Description of Exhibits |
| |
| |
| 10(d)(i) | | Deferred Compensation Plan, as amended and restated as of December 31, 2007 |
| | | |
| |
| 10(d)(ii) | | 1996 Directors’ Deferral Plan, as amended and restated as of December 31, 2007 |
| | | |
| |
| 10(r) | | Amended and Restated Five-Year Credit Agreement, dated as of December 1, 2006 among the registrant and the banks named therein. |
| | |
| | |
| 31 | | Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to SEC Rule 13a - 14(a). |
| | | |
| |
| 32 | | Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a - 14(b) and Section 1350 of Chapter 63 of Title 18 of the U.S. Code. |
| | | |
| | | |
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