by increases in sales of pen needles of $12 million and increases in blood glucose monitoring (“BGM”) sales of $8 million. Increases in sales of Pharmaceutical Systems products were partially driven by demand from pharmaceutical companies preparing for major product launches in the United States and Europe, as well as comparison to a weak prior year’s quarter. Medical revenues also reflect the continued conversion in the United States to safety-engineered products, which accounted for sales of $132 million, as compared with $126 million in the prior year’s quarter. In the prior year, Medical experienced inventory builds at a major distributor in the first quarter, which included safety-engineered products and resulted in inventory reductions by that distributor in the prior year’s second quarter. Included in Medical revenues were international sales of safety-engineered products of $22 million, compared with $18 million in the prior year’s quarter.
Diagnostics Segment
Segment operating income for the first quarter was $122 million, or approximately 27.4% of Diagnostics revenues, compared to $103 million, or approximately 24.9%, in the prior year’s quarter. 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 product, flu diagnostic tests, and theBD ProbeTecET platform. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percentage of Diagnostics revenues in the first quarter of 2006 was slightly lower compared with the first quarter of 2005 primarily due to tight controls on spending. Research and development expenses in the first quarter of 2006 increased $1 million, or 5.6%.
Biosciences Segment
Segment operating income for the first quarter was $47 million, or 23.6% of Biosciences revenues, compared to $37 million, or 20.6%, in the prior year’s quarter. 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, research instruments and reagents. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percent of Biosciences revenues for the quarter was 26.2% versus 27.3% in the prior year’s quarter. This decrease was attributable to revenue growth as well as continued effective spending control. Research and development expenses in the prior year’s quarter increased $0.9 million, or 7.0%, reflecting spending on new product development, particularly in the Immunocytometry Systems unit.
Gross Profit Margin
Gross profit margin was 52.2% for the first quarter, compared with 50.8% for the prior year period. Gross profit margin in the first quarter of fiscal 2006 as compared to the prior period reflected an estimated 1.1% improvement relating to increased sales of products with higher margins, an estimated 0.7% improvement associated primarily with productivity gains, with the remaining 0.3% improvement resulting from stronger currency. These gross profit margin improvements were partially offset by an estimated 0.4% relating to higher raw material costs, primarily petroleum-based resins, and an increase in share-based compensation of 0.3%. We expect gross profit margin to improve, on a reported basis, by about 50 basis points in fiscal 2006 (before taking into account the impact of the anticipated acquisition of GeneOhm Sciences, Inc. (“GeneOhm Sciences”), as further discussed above).
Selling and Administrative Expense
Selling and administrative expense was 26.0% of revenues for the first quarter, compared with 26.5% for the prior year’s period. Aggregate expenses for the current period reflect increases in share-based compensation expense of $16 million, in base spending of $15 million, in line with inflation, and in expenses related to the BGM initiative of $8 million. These increases in selling and administrative expense were partially offset by proceeds from an insurance settlement of $7 million and a favorable foreign exchange impact of $5 million. Selling and administrative expense as a percentage of revenues is expected to decrease, on a reported basis, by about 50 to 60 basis points in fiscal 2006 (before taking into account the impact of the anticipated acquisition of GeneOhm Sciences, as further discussed above).
Research and Development Expense
Research and development expense was $69 million, or 4.9% of revenues for the first quarter,
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compared with the prior year’s amount of $62 million, or 4.8% of revenues. The increase in research and development expenditures reflects increased spending for new programs in each of our segments and an increase in share-based compensation of $3 million. We anticipate research and development expense to increase, on a reported basis, about 12% to 13% for fiscal 2006 (before taking into account the impact of the anticipated acquisition of GeneOhm Sciences, as further discussed above).
Non-Operating Expense and Income
Interest expense increased to $17 million in the current quarter from $14 million in the prior year’s quarter and reflects higher debt levels and the impact of higher interest rates on floating rate debt and on interest rate swap transactions, consisting of fair value hedges of certain fixed-rate debt instruments, under which the difference between fixed and floating interest rates is exchanged at specified intervals. Interest income increased to $15 million in the current quarter from $5 million in the prior year’s period, and reflects higher interest rates and cash balances.
Income Taxes
The income tax rate was 26.9% for the first quarter, compared with the prior year’s rate of 18.6%. The prior year’s rate reflected an estimated 6.8% benefit due to the reversal of tax reserves in connection with the conclusion of tax examinations in four non-U.S. jurisdictions as well as certain tax-related events that caused the first fiscal quarter 2005 tax rate to vary from the then expected tax rate for fiscal 2005. The Company expects the reported tax rate for the full year to be approximately 26% (before taking into account the impact of the anticipated acquisition of GeneOhm Sciences, as further discussed above).
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 2006 were $218 million and 85 cents, respectively. Proceeds from an insurance settlement increased income from continuing operations by $4 million and diluted earnings per share from continuing operations by 2 cents. This compared with income from continuing operations and diluted earnings per share from continuing operations for the prior year’s first quarter of $194 million and 74 cents, respectively. The prior year’s quarter included the effect of the reversal of tax reserves, as described above, which increased income from continuing operations by $11 million and diluted earnings per share from continuing operations by 4 cents.
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 $171 million during the first quarter of fiscal 2006, and $264 million in the same period in fiscal 2005. Net cash provided by operations was reduced by a change in the pension obligation of $127 million, which reflected a discretionary cash contribution of $150 million. BD’s funding policy for its defined benefit pension plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts that management may determine to be appropriate considering the funded status of the plans, tax deductibility, cash flows, and other factors.
Net cash used for continuing investing activities for the first quarter of the current year was $92
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million, compared to $79 million in the same period a year ago. Capital expenditures were $64 million in the first quarter of fiscal 2006 and $50 million in the same period in fiscal 2005. We expect capital spending for fiscal 2006 to be in the $400 million range.
Net cash provided by continuing financing activities in the first quarter of the current year was $47 million, compared to net cash used for continuing financing activities of $85 million in the prior year period. As of December 31, 2005, total debt of $1.4 billion represented 28.0% of total capital (shareholders’ equity, net non-current deferred income tax liabilities, and debt), versus 27.3% at September 30, 2005. Short-term debt increased to 30% of total debt at the end of the fiscal quarter, from 16% at September 30, 2005.
For the first quarter of the current year, the Company repurchased approximately $101 million of its common stock compared with approximately $112 million in the prior year period. At December 31, 2005, 2.6 million common shares remained available for purchase pursuant to a repurchase program for 10 million shares authorized by the Board of Directors (the “Board”) in November 2004. The Board authorized an additional repurchase program for 10 million shares on November 22, 2005. Stock repurchases were offset, in part, by the issuance of common stock from treasury due to the exercising of stock options by employees.
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 approximately $299 million at December 31, 2005. We maintain a $900 million syndicated credit facility in order to provide backup support for our commercial paper program and for other general corporate purposes. This credit facility expires in August 2009 and 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 had ranged from 18-to-1 to 21-to-1. The facility, under which there were no borrowings outstanding at December 31, 2005, can be used to support the commercial paper program or for general corporate purposes. In addition, we have informal lines of credit outside the United States.
BD’s ability to generate cash flow from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected in the event there was a material decline in the demand for BD’s products, deterioration in BD’s key financial ratios or credit ratings or other significantly unfavorable changes in conditions. While a deterioration in the Company’s credit ratings would increase the costs associated with maintaining and borrowing under its existing credit arrangements, such a downgrade would not affect the Company’s ability to draw on these credit facilities, nor would it result in an acceleration of the scheduled maturities of any outstanding debt.
We will repatriate a total of approximately $1.3 billion of foreign earnings during fiscal 2006 pursuant to our approved plan under the American Jobs Creation Act of 2004.
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Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995 -- “Safe Harbor” for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of BD. BD and its representatives may from time to time make certain forward-looking statements, 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 which 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, gross profit margins, various expenditures and statements expressing views about future operating results -- are forward-looking statements within the meaning of the Act.
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:
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• | 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. |
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• | We operate in a highly competitive environment. New product introductions by our current or future competitors 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. |
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• | Recently, the U.S. Food and Drug Administration (“FDA”) and European authorities have approved a new inhaled form of insulin for adults, which could adversely impact sales of our insulin injection devices. |
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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. |
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• | The effects, if any, of governmental and media activities relating to U.S. Congressional hearings regarding the business practices of group purchasing organizations, which negotiate product prices on behalf of their member hospitals with BD and other suppliers. |
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• | Fluctuations in the cost and availability of 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. |
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• | Our ability to obtain the anticipated benefits of any restructuring programs, if any, that we may undertake. |
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• | 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, or changes in enforcement practices with respect to any such laws and regulations. |
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• | Fluctuations in U.S. and international governmental funding and policies for life science research. |
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• | 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, 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. |
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• | Pending and potential litigation or other proceedings adverse to BD, including antitrust claims, product liability claims, and patent infringement claims, as well as other risks and uncertainties detailed from time to time in our SEC filings. |
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• | The effects, if any, of adverse media exposure or other publicity regarding BD’s business or operations. |
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• | 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. |
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• | Our ability to effect infrastructure enhancements and incorporate new systems technologies into our operations. |
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• | Product efficacy or safety concerns resulting in product recalls, regulatory action on the part of the FDA (or foreign counterparts) or declining sales. |
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• | Economic and political conditions in international markets, including civil unrest, governmental changes and restrictions on the ability to transfer capital across borders. |
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• | 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. |
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• | 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. |
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• | The impact of business combinations, including acquisitions and divestitures, both internally for BD and externally, in the healthcare industry. |
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• | 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.
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, 2005.
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, 2005. 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, adequate and effective to ensure that material information relating to BD and its consolidated
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subsidiaries would be made known to them by others within these entities. There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2005 identified in connection with the above-referenced evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
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Item 1. | Legal Proceedings |
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| 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. A more complete description of legal proceedings has been set forth in our 2005 Annual Report on Form 10-K (the “10-K”). Since the beginning of the quarter ended December 31, 2005, the following changes have occurred. |
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| Antitrust Class Actions
On January 17, 2006, Drug Mart Tallman filed a purported class action lawsuit against BD in the United States District Court in Newark, New Jersey(Drug Mart Tallman, Inc., et al v. Becton Dickinson and Company, Case No. 2:06-CV-00174). The complaint alleges that BD violated federal and various state antitrust laws, resulting in the charging of higher prices for certain BD products to plaintiff and other indirect purchasers of BD products. BD believes that it has meritorious defenses to this suit and intends to defend this suit vigorously. The above action is the seventh antitrust class action suit brought against BD by either direct or indirect purchasers of BD’s products. These antitrust class action lawsuits, including the above action, have been consolidated for pre-trial purposes in a Multi-District Litigation (MDL) in federal court in New Jersey. |
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| 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 discussed above, 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 in the period or periods in which they are recorded or paid. |
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Item 1A. | Risk Factors |
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| Not applicable. |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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| The table below sets forth certain information regarding our purchases of common stock of BD during the fiscal quarter ended December 31, 2005. |
Issuer Purchases of Equity Securities
| | | | | | | | | | | | | |
For the three months ended
December 31, 2005 | | 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 | |
| |
| |
| |
| |
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October 1 – 31, 2005 | | | 4,033 | | $ | 50.68 | | | — | | | 4,344,914 | |
November 1 – 30, 2005 | | | 600,639 | | $ | 58.65 | | | 600,000 | | | 13,744,914 | |
December 1 – 31, 2005 | | | 1,115,117 | | $ | 59.42 | | | 1,100,000 | | | 12,644,914 | |
Total | | | 1,719,789 | | $ | 59.13 | | | 1,700,000 | | | 12,644,914 | |
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| (1) | Includes for the quarter 18,049 shares purchased in open market transactions by the trustee under BD’s Deferred Compensation Plan and 1996 Directors’ Deferral Plan. Also includes 1,740 shares delivered to the Company in connection with stock option exercises. |
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| (2) | These repurchases were made pursuant to a repurchase program for 10 million shares announced on November 23, 2004 (the “2004 Program”). There is no expiration date for the 2004 Program. On November 22, 2005, the Board of Directors of BD authorized an additional repurchase program for 10 million shares. |
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Item 3. | Defaults Upon Senior Securities. |
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| Not applicable. |
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Item 4. | Submission of Matters to a Vote of Security Holders. |
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| There were no matters submitted to a vote of security holders during the fiscal quarter ended December 31, 2005. |
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| Our Annual Meeting of Shareholders was held on January 31, 2006, at which the following matters were voted upon: |
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| | |
| i.) | A management proposal for the election of three directors for the terms indicated below was voted upon as follows: |
| | | | | | | | | | | |
| | | | | | Votes | |
| | | | | |
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| Nominee | | Term | | For | | Withheld | |
|
| |
| |
| |
| |
| Edward J. Ludwig | | | 3 Years | | | 208,868,737 | | | 6,905,452 | |
| Willard J. Overlock, Jr. | | | 3 Years | | | 212,162,197 | | | 3,611,992 | |
| Bertram L. Scott | | | 3 Years | | | 209,297,765 | | | 6,476,424 | |
| | |
| | The directors whose term of office as a director continued after the meeting are: Basil L. Anderson, Henry P. Becton, Jr., Edward F. DeGraan,Gary A. Mecklenburg, James F. Orr, James E. Perrella, Alfred Sommer and Margaretha af Ugglas. |
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| 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, 2006 was voted upon. 211,302,059 shares were voted for the proposal, 2,964,216 shares were voted against, and 1,507,914 shares abstained. |
| | |
| iii.) | A shareholder proposal requesting that the Board of Directors publish a report evaluating the Company’s policies on brominated flame retardants and other toxic chemicals was voted upon. 14,393,882 shares were voted for the proposal, 150,699,713 shares were voted against, 26,390,342 shares abstained, and there were 24,290,252 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. 74,079,013 shares were voted for the proposal, 97,376,269 shares were voted against, 20,028,655 shares abstained, and there were 24,290,252 broker non-votes. |
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Item 5. | Other Information. |
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| As was disclosed in BD's proxy statement for its 2006 annual meeting of shareholders (the "Proxy Statement"), on December 7, 2005, BD and Edward J. Ludwig, the Chairman, President and Chief Executive Officer of BD, entered into a time sharing agreement under which Mr. Ludwig will make lease payments to BD for his personal use of the BD corporate aircraft, up to the maximum amount permitted by Federal Aviation Administration regulations. |
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| As was also disclosed in the Proxy Statement, during the period covered by this report, BD entered into change of control employment agreements with each of its executive officers and with other corporate officers that provide for the continued employment of such persons for a period of time following a change of control of BD. |
| |
| The time sharing agreement with Mr. Ludwig and the forms of the change of control employment agreements described above were filed as exhibits to BD’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005. |
| | |
| Exhibit 10(a) | Stock Award Plan, as amended and restated as of January 31, 2006. |
| | |
| 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 8, 2006
| | |
| /s/ John R. Considine | |
|
| |
| John R. Considine | |
| Executive Vice President and | |
| Chief Financial Officer | |
| (Principal Financial Officer) | |
| | |
| /s/ William A. Tozzi | |
|
| |
| William A. Tozzi | |
| Vice President and Controller | |
| (Chief Accounting Officer) | |
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INDEX TO EXHIBITS
| | |
Exhibit Number | | Description of Exhibits |
| |
|
10(a) | | Stock Award Plan, as amended and restated as of January 31, 2006. |
| | |
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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