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BECTON DICKINSON & CO 10-K 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED SEPTEMBER 30, 2010
(201) 847-6800
(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Smaller reporting
company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of March 31, 2010, the aggregate market value of the
registrant’s outstanding common stock held by
non-affiliates of the registrant was approximately
$18,325,503,422.
As of October 31, 2010, 229,961,230 shares of the
registrant’s common stock were outstanding.
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement for the Annual
Meeting of Shareholders to be held February 1, 2011 are
incorporated by reference into Part III hereof.
TABLE
OF CONTENTS
Table of Contents
PART I
Becton, Dickinson and Company (also known as “BD”) was
incorporated under the laws of the State of New Jersey in
November 1906, as successor to a New York business started in
1897. BD’s executive offices are located at 1 Becton Drive,
Franklin Lakes, New Jersey
07417-1880,
and its telephone number is
(201) 847-6800.
All references in this
Form 10-K
to “BD” refer to Becton, Dickinson and Company and its
domestic and foreign subsidiaries, unless otherwise indicated by
the context.
BD is a global medical technology company engaged principally in
the development, manufacture and sale of medical devices,
instrument systems and reagents used by healthcare institutions,
life science researchers, clinical laboratories, the
pharmaceutical industry and the general public.
BD’s operations consist of three worldwide business
segments: BD Medical, BD Diagnostics and BD Biosciences.
Information with respect to BD’s business segments is
included in Note 6 to the consolidated financial statements
contained in Item 8, Financial Statements and Supplementary
Data, and is incorporated herein by reference.
BD Medical produces a broad array of medical devices that are
used in a wide range of healthcare settings. BD Medical’s
principal product lines include needles, syringes and
intravenous catheters for medication delivery (including
safety-engineered and auto-disable devices); prefilled IV
flush syringes; syringes and pen needles for the self-injection
of insulin and other drugs used in the treatment of diabetes;
prefillable drug delivery systems provided to pharmaceutical
companies and sold to end-users as drug/device combinations;
regional anesthesia needles and trays; and sharps disposal
containers. The primary customers served by BD Medical are
hospitals and clinics; physicians’ office practices;
consumers and retail pharmacies; governmental and nonprofit
public health agencies; pharmaceutical companies; and healthcare
workers.
BD Diagnostics provides products for the safe collection and
transport of diagnostics specimens, as well as instrument
systems and reagents to detect a broad range of infectious
diseases, healthcare-associated infections (“HAIs”)
and cancers. BD Diagnostics’ principal products include
integrated systems for specimen collection; safety-engineered
blood collection products and systems; automated blood culturing
systems; molecular testing systems for sexually transmitted
diseases and HAIs; microorganism identification and drug
susceptibility systems; liquid-based cytology systems for
cervical cancer screening; rapid diagnostic assays; and plated
media. BD Diagnostics serves hospitals, laboratories and
clinics; reference laboratories; blood banks; healthcare
workers; public health agencies; physicians’ office
practices; and industrial and food microbiology laboratories.
BD Biosciences produces research and clinical tools that
facilitate the study of cells, and the components of cells, to
gain a better understanding of normal and disease processes.
That information is used to aid the discovery and development of
new drugs and vaccines, and to improve the diagnosis and
management of diseases. BD Biosciences’ principal product
lines include fluorescence-activated cell sorters and analyzers;
monoclonal antibodies and kits for performing cell analysis;
reagent systems for life science research; cell imaging systems;
laboratory products for tissue culture and fluid handling;
diagnostic assays; and cell culture media supplements for
biopharmaceutical manufacturing. The primary customers served by
BD Biosciences
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are research and clinical laboratories; academic and
governmental institutions; pharmaceutical and biotechnology
companies; hospitals; and blood banks.
On November 19, 2009, BD acquired 100% of the outstanding
shares of HandyLab, Inc. (“HandyLab”), a company that
develops and manufactures molecular diagnostic assays and
automation platforms. The purchase price was $275 million
in cash. HandyLab has developed and commercialized a flexible
automated platform for performing molecular diagnostics that
complements BD’s molecular diagnostics offerings,
specifically in the area of HAIs. Additional information
regarding this transaction is contained in Note 9 to the
consolidated financial statements contained in Item 8,
Financial Statements and Supplementary Data, which is
incorporated herein by reference.
Divestitures
During the fourth quarter of 2010, the Company sold the
Ophthalmic Systems unit, as well as the surgical blades,
critical care and extended dwell catheter product platforms of
the Medical Surgical Systems unit for $270 million.
Additional information regarding this transaction is contained
in Note 10 to the consolidated financial statements
contained in Item 8, Financial Statements and Supplementary
Data, which is incorporated herein by reference.
BD’s products are manufactured and sold worldwide. For
reporting purposes, we organize our operations outside the
United States as follows: Europe (which includes the Middle
East and Africa); Japan; Asia Pacific (which includes Australia
and all of Asia except Japan); Latin America (which includes
Mexico and Brazil) and Canada. The principal products sold by BD
outside the United States are needles and syringes; insulin
syringes and pen needles; diagnostic systems; BD
Vacutainertm
brand blood collection products; BD
Hypaktm
brand prefillable syringe systems; infusion therapy products;
flow cytometry instruments and reagents; and disposable
laboratory products. BD has manufacturing operations outside the
United States in Brazil, Canada, China, France, Germany,
Hungary, India, Ireland, Japan, Mexico, Pakistan, Singapore,
South Korea, Spain, Sweden and the United Kingdom. Geographic
information with respect to BD’s operations is included
under the heading “Geographic Information” in
Note 6 to the consolidated financial statements included in
Item 8, Financial Statements and Supplementary Data, and is
incorporated herein by reference.
Foreign economic conditions and exchange rate fluctuations have
caused the profitability related to foreign revenues to
fluctuate more than the profitability related to domestic
revenues. BD believes its activities in some countries outside
the United States involve greater risk than its domestic
business due to the factors cited herein, as well as the
economic environment, local commercial and economic policies and
political uncertainties. See further discussion of this risk in
Item 1A. Risk Factors.
BD’s products are marketed in the United States and
internationally through independent distribution channels and
directly to end-users by BD and independent sales
representatives. No customer accounted for 10% or more of
revenues in fiscal year 2010. Order backlog is not material to
BD’s business inasmuch as orders for BD products generally
are received and filled on a current basis, except for items
temporarily out of stock. BD’s worldwide sales are not
generally seasonal, with the exception of certain medical
devices in the BD Medical segment, and respiratory and flu
diagnostic products in the BD Diagnostics segment, that relate
to seasonal diseases such as influenza.
BD purchases many different types of raw materials, including
plastics, glass, metals, textiles, paper products, agricultural
products, electronic and mechanical
sub-assemblies
and various biological, chemical and petrochemical products.
Certain raw materials (primarily related to the BD Biosciences
segment) are not available from multiple sources. In the case of
certain principal raw materials that are available from multiple
sources, for various reasons (including quality assurance and
cost effectiveness), BD elects to purchase these
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raw materials from sole suppliers. In cases where there are
regulatory requirements relating to qualification of suppliers,
BD may not be able to establish additional or replacement
sources on a timely basis. While BD works closely with its
suppliers to ensure continuity of supply, the termination,
reduction or interruption in supply of these sole-sourced raw
materials could impact our ability to manufacture and sell
certain of our products.
BD conducts its research and development (“R&D”)
activities at its operating units and at BD Technologies in
Research Triangle Park, North Carolina. The majority of
BD’s R&D activities are conducted in the United
States. Outside the United States, BD conducts R&D
activities at BD Diagnostic Systems in Quebec City, Canada, BD
Pharmaceutical Systems in Pont de Claix, France, and BD Medical
Surgical Systems in Tuas, Singapore. BD also collaborates with
certain universities, medical centers and other entities on
R&D programs, and retains individual consultants to support
its efforts in specialized fields. BD spent approximately
$431 million, $405 million and $383 million on
research and development during the fiscal years ended
September 30, 2010, 2009 and 2008, respectively.
BD owns significant intellectual property, including patents,
patent applications, technology, trade secrets, know-how,
copyrights and trademarks in the United States and other
countries. BD is also licensed under domestic and foreign
patents, patent applications, technology, trade secrets,
know-how, copyrights and trademarks owned by others. In the
aggregate, these intellectual property assets and licenses are
of material importance to BD’s business. BD believes,
however, that no single patent, technology, trademark,
intellectual property asset or license is material in relation
to BD’s business as a whole, or to any business segment.
BD operates in the increasingly complex and challenging medical
technology marketplace whose dynamics are changing.
Technological advances and scientific discoveries have
accelerated the pace of change in medical technology, the
regulatory environment of medical products is becoming more
complex and vigorous, and economic conditions have resulted in a
challenging market. Companies of varying sizes compete in the
global medical technology field. Some are more specialized than
BD with respect to particular markets, and some have greater
financial resources than BD. New companies have entered the
field, particularly in the areas of molecular diagnostics,
safety-engineered devices and in the life sciences, and
established companies have diversified their business activities
into the medical technology area. Other firms engaged in the
distribution of medical technology products have become
manufacturers of medical devices and instruments as well.
Acquisitions and collaborations by and among companies seeking a
competitive advantage also affect the competitive environment.
In addition, the entry into the market of manufacturers located
in China and other low-cost manufacturing locations are creating
increased pricing pressures, particularly in developing markets.
Some competitors have also established manufacturing sites or
have contracted with suppliers located in these countries as a
means to lower their costs. New entrants may also appear,
particularly from these low-cost countries.
BD competes in this evolving marketplace on the basis of many
factors, including price, quality, innovation, service,
reputation, distribution and promotion. The impact of these
factors on BD’s competitive position varies among BD’s
various product offerings. In order to remain competitive in the
industries in which it operates, BD continues to make
investments in research and development, quality management,
quality improvement, product innovation and productivity
improvement in support of its core strategy — to
increase revenue growth by focusing on products that deliver
greater benefits to patients, healthcare workers and researchers.
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Healthcare providers
and/or
facilities are generally reimbursed for their services through
numerous payment systems maintained by governmental agencies
(e.g., Medicare and Medicaid in the United States, the National
Health Service in the United Kingdom, the Joint Federal
Committee in Germany, the Commission d’Evaluation des
Produits et prestations in France, and the Ministry for
Health, Labor and Welfare in Japan), private insurance
companies, and managed care organizations. The manner and level
of reimbursement in any given case may depend on the site of
care, the procedure(s) performed, the final patient diagnosis,
the device(s)
and/or
drug(s) utilized, the available budget, or a combination of
these factors, and coverage and payment levels are determined at
the payer’s discretion. The coverage policies and
reimbursement levels of these third-party payers may impact the
decisions of healthcare providers and facilities regarding which
medical products they purchase and the prices they are willing
to pay for those products. Thus, changes in reimbursement level
or method may either positively or negatively impact sales of BD
products.
While BD is actively engaged in promoting the value of its
products for payers and patients, and it employs various efforts
and resources to positively impact coverage, coding and payment
processes in this regard, it has no direct control over payer
decision-making with respect to coverage and payment levels for
BD products. Additionally, we expect many payers to continue to
explore cost-containment strategies (e.g., comparative
effectiveness analyses, so-called
“pay-for-performance”
programs implemented by various public and private payers, and
expansion of payment bundling schemes such as Accountable Care
Organizations or ACOs) that could potentially impact coverage
and/or
payment levels for current or future BD products.
As BD’s product offerings are diverse across many
healthcare settings, they are affected to varying degrees by the
many payment systems. Therefore, individual countries, product
lines or product classes may be impacted by changes to these
systems. Notably, the recently-enacted healthcare reform
legislation in the United States (i.e., the Patient
Protection and Affordable Care Act (“PPACA”)) provides
for numerous, substantive changes to U.S. healthcare
payment systems, most of which are yet to be established in
regulations. As yet, it is unclear whether, or how, the
implementation of regulations pursuant to the PPACA might affect
payment for BD products. See Item 1A. Risk Factors for a
further discussion.
BD’s medical technology products and operations are subject
to regulation by the U.S. Food and Drug Administration
(“FDA”) and various other federal and state agencies,
as well as by foreign governmental agencies. These agencies
enforce laws and regulations that govern the development,
testing, manufacturing, labeling, advertising, marketing and
distribution, and market surveillance of BD’s medical
products. The scope of the activities of these agencies,
particularly in the Europe, Japan and Asia Pacific regions in
which BD operates, has been increasing.
BD actively maintains FDA/ISO Quality Systems that establish
standards for its product design, manufacturing, and
distribution processes. Prior to marketing or selling most of
its products, BD must secure approval from the FDA and
counterpart
non-U.S. regulatory
agencies. Following the introduction of a product, these
agencies engage in periodic reviews of BD’s quality
systems, as well as product performance, and advertising and
promotional materials. These regulatory controls, as well as any
changes in FDA policies, can affect the time and cost associated
with the development, introduction and continued availability of
new products. Where possible, BD anticipates these factors in
its product development and planning processes.
These agencies possess the authority to take various
administrative and legal actions against BD, such as product
recalls, product seizures and other civil and criminal
sanctions. BD also undertakes voluntary compliance actions such
as voluntary recalls.
BD also is subject to various federal and state laws, and laws
outside the United States, concerning healthcare fraud and abuse
(including false claims laws and anti-kickback laws), global
anti-corruption, transportation, safety and health, and customs
and exports. Many of the agencies enforcing these laws have
increased their enforcement activities with respect to medical
device manufacturers in recent years. This
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appears to be part of a general trend toward increased
regulation and enforcement activity within and outside the
United States.
BD believes it is in compliance in all material respects with
applicable law and the regulations promulgated by the applicable
agencies (including, without limitation, environmental laws and
regulations), and that such compliance has not had, and will not
have, a material adverse effect on our operations or results.
See Item 3. Legal Proceedings.
As of September 30, 2010, BD had 28,803 employees, of
whom 12,262 were employed in the U.S. (including Puerto
Rico). BD believes that its employee relations are satisfactory.
Becton Dickinson France, S.A. (“BD-France”), a
subsidiary of BD, was listed among approximately 2,200 other
companies in an October 27, 2005 report of the Independent
Inquiry Committee (“IIC”) of the United Nations
(“UN”) as having been involved in humanitarian
contracts in which unauthorized payments were suspected of
having been made to the Iraqi Government in connection with the
UN’s
Oil-for-Food
Programme (the “Programme”). In connection with the
IIC’s report, Becton Dickinson AG, a Swiss subsidiary of
BD, received a letter of inquiry from the Vendor Review
Committee (“VRC”) of the United Nations Procurement
Service dated November 22, 2005. The letter of inquiry said
that the VRC is reviewing Becton Dickinson AG’s
registration status in light of BD-France being listed in the
IIC’s report and asked us for any information we might be
able to provide relating to the findings of the report. BD
conducted an internal review and found no evidence that BD or
any BD employee made, authorized, or approved improper payments
to the Iraqi Government in connection with the Programme. The
representative utilized by BD in Iraq also unequivocally denied
having made any such payments, and BD was unable to find any
evidence of such payments being made by this representative. BD
reported the results of its internal review to the VRC. In May
2008, BD received a letter from the U.N. stating that Becton
Dickinson AG had been suspended from the UN Secretariat
Procurement Division’s vendor roster for a minimum period
of six months. We have requested that Becton Dickinson AG be
reinstated. BD believes that the suspension has not had, and
will not have, a material adverse effect on BD.
In May 2007, the French Judicial Police conducted searches of
BD-France’s offices in France with respect to the matters
that were the subject of the 2005 IIC report. We were informed
that BD-France is one of a number of companies named in the IIC
report that is being investigated by the French Judicial Police.
In June 2009, the Belgian Federal Police contacted BD to
interview certain individuals and review documents related to
sales made under the Programme. We are cooperating fully with
these investigations.
BD maintains a website at www.bd.com. BD also makes
available its Annual Reports on
Form 10-K,
its Quarterly Reports on
Form 10-Q,
and its Current Reports on
Form 8-K
(and amendments to those reports) as soon as reasonably
practicable after those reports are electronically filed with,
or furnished to, the Securities and Exchange Commission
(“SEC”). These filings may be obtained and printed
free of charge at
www.bd.com/investors.
In addition, the written charters of the Audit Committee, the
Compensation and Benefits Committee, the Corporate and
Scientific Affairs Committee, the Corporate Governance and
Nominating Committee, and the Executive Committee of the Board
of Directors, the Company’s Corporate Governance Principles
and its Business Conduct and Compliance Guide, are available at
BD’s website at
www.bd.com/investors/corporate_governance/.
Printed copies of these materials, BD’s 2010 Annual Report
on
Form 10-K,
and BD’s reports and statements filed with, or furnished
to, the SEC, may be obtained, without charge, by contacting the
Corporate Secretary, BD, 1 Becton Drive, Franklin Lakes, New
Jersey
07417-1880,
telephone
201-847-6800.
BD also routinely posts important information for investors on
its website at www.bd.com/investors. BD may use this
website as a means of disclosing material, non-public
information and for complying with its
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disclosure obligations under Regulation FD adopted by the
SEC. Accordingly, investors should monitor the Investor
Relations portion of BD’s website noted above, in addition
to following BD’s press releases, SEC filings, and public
conference calls and webcasts. Our website and the information
contained therein or connected thereto shall not be deemed to be
incorporated into this Annual Report.
BD and its representatives may from
time-to-time
make certain forward-looking statements in publicly-released
materials, both written and oral, including statements contained
in filings with the SEC and in our reports to shareholders.
Additional information regarding our forward-looking statements
is contained Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
An investment in BD involves a variety of risks and
uncertainties. The following describes some of the significant
risks that could adversely affect BD’s business, financial
condition, operating results or cash flows.
The current economic conditions may result in a decrease in the
demand for our products and services, longer sales cycles,
slower adoption of new technologies and increased price
competition. During fiscal year 2010, lower laboratory testing
volumes and physician visits in the United States and
macroeconomic factors in Western Europe contributed to weakened
demand for our products. Any austerity plans implemented in
Europe or other regions where governments are the primary payers
of healthcare expenses and research may also result in a
decrease in demand for our products. In addition, while the
current economic conditions have not impaired our ability to
access credit markets to date, there can be no assurance that
these conditions will not adversely affect our ability to do so
in the future. The current economic conditions may adversely
affect our suppliers, and there can be no assurances that BD
will not experience any interruptions in supply in the future.
The increase in sovereign debt during the financial crisis as a
result of governmental intervention in the world economy poses
additional risks to the global financial system and economic
recovery. We have experienced delays in collecting receivables
in Greece due to the Greek government’s liquidity problems.
We may experience similar delays in other jurisdictions
experiencing liquidity problems. The strength and timing of any
economic recovery remains uncertain, and there can be no
assurance that the economic downturn will not continue to affect
our operations in the future.
Over half of our fiscal year 2010 revenues were derived from
international operations. Our revenues outside the United
States may be adversely affected by fluctuations in foreign
currency exchange rates. A discussion of the financial impact of
exchange rate fluctuations and the ways and extent to which we
may attempt to address any impact is contained in Item. 7,
Management’s Discussion of Financial Condition and Results
of Operations. Any hedging activities in which we may engage
only offset a portion of the adverse financial impact resulting
from unfavorable changes in foreign currency exchange rates. We
cannot predict with any certainty changes in foreign currency
exchange rates or the degree to which we can address these risks.
Federal
healthcare reform may adversely affect our results of
operations.
The Patient Protection and Affordable Care Act (the
“PPACA”) was enacted in March 2010. Under the PPACA,
beginning in 2013, medical device manufacturers, such as BD,
will pay a 2.3% excise tax on U.S. sales of certain medical
devices. Sales of BD products that we estimate to be subject to
this tax represented about 80% of BD’s total
U.S. revenues in fiscal year 2010. We cannot predict with
any certainty what other impact the PPACA may have on our
business. The PPACA reduces Medicare and Medicaid payments to
hospitals, clinical laboratories and pharmaceutical companies,
and could otherwise reduce the volume of medical procedures.
These factors, in turn, could result in reduced demand for our
products and increased downward pricing pressure. It is also
possible that the PPACA will result in lower reimbursements
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for our products. While the PPACA is intended to expand health
insurance coverage to uninsured persons in the United States,
the impact of any overall increase in access to healthcare on
sales of BD’s products is uncertain at this time.
Our sales depend, in part, on the extent to which healthcare
providers and facilities are reimbursed by government
authorities, private insurers and other third-party payers for
the costs of our products. The coverage policies and
reimbursement levels of third-party payers, which can vary among
public and private sources, may affect which products customers
purchase and the prices they are willing to pay for these
products in a particular jurisdiction. Legislative or
administrative reforms to reimbursement systems in the United
States (as part of the PPACA) or abroad (for example, those
under consideration in France, Germany, Italy and the United
Kingdom) could significantly reduce reimbursement for procedures
using BD products, or result in denial of reimbursement for
those products. See “Third-Party Reimbursement” under
Item 1. Business.
Price
volatility could adversely affect costs associated with our
operations.
Our results of operations could be negatively impacted by price
volatility in the cost of raw materials, components, freight and
energy. In particular, BD purchases supplies of resins, which
are oil-based components used in the manufacture of certain
products. Any significant increases in resin purchase costs
could impact future operating results. Increases in the price of
oil can also increase BD’s costs for packaging and
transportation. New laws or regulations adopted in response to
climate change could also increase energy costs and the costs of
certain raw materials and components. These cost increases may
adversely affect our profitability.
A significant element of our strategy is to increase revenue
growth by focusing on products that deliver greater benefits to
patients, healthcare workers and researchers. The development of
these products requires significant research and development,
clinical trials and regulatory approvals. The results of our
product development efforts may be affected by a number of
factors, including BD’s ability to innovate, develop and
manufacture new products, complete clinical trials, obtain
regulatory approvals and reimbursement in the United States and
abroad, or gain and maintain market approval of our products. In
addition, patents attained by others can preclude or delay our
commercialization of a product. There can be no assurance that
any products now in development or that we may seek to develop
in the future will achieve technological feasibility, obtain
regulatory approval, or gain market acceptance.
The
medical technology industry is very competitive.
The medical technology industry is subject to rapid
technological changes, and we face significant competition
across our product lines and in each market in which our
products are sold. We face this competition from a wide range of
companies. These include large medical device companies, some of
which may have greater financial and marketing resources than we
do. We also face competition from firms that are more
specialized than we are with respect to particular markets.
Other firms engaged in the distribution of medical technology
products have become manufacturers of medical devices and
instruments as well. In some instances, competitors, including
pharmaceutical companies, also offer, or are attempting to
develop, alternative therapies for disease states that may be
delivered without a medical device. The development of new or
improved products, processes or technologies by other companies
(such as needle-free injection technology) may render our
products or proposed products obsolete or less competitive. In
addition, increasing customer demand for more
environmentally-friendly products is creating another basis on
which BD must compete. The entry into the market of
manufacturers located in China and other low-cost manufacturing
locations is also creating increased pricing pressures,
particularly in developing markets. Some competitors have also
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established manufacturing sites or have contracted with
suppliers located in these countries as a means to lower their
costs. New entrants may also appear, particularly from these
low-cost countries.
BD purchases many different types of raw materials and
components. Certain raw materials (primarily related to the BD
Biosciences segment) and components are not available from
multiple sources. In addition, for quality assurance,
cost-effectiveness and other reasons, BD elects to purchase
certain raw materials and components from sole suppliers. The
supply of these materials can be disrupted for a number of
reasons, including current economic conditions as described
above. While we work with suppliers to ensure continuity of
supply, no assurance can be given that these efforts will be
successful. In addition, where there are regulatory requirements
relating to the qualification of suppliers, we may not be able
to establish additional or replacement sources on a timely
basis. The termination, reduction or interruption in supply of
these sole-sourced raw materials and components could impact our
ability to manufacture and sell certain of our products.
We have manufacturing sites all over the world. In addition, in
some instances, the manufacturing of certain of our product
lines is concentrated in one or more of our plants. As a result,
weather, natural disasters (including pandemics), terrorism,
political change, failure to follow specific internal protocols
and procedures, equipment malfunction, environmental factors or
damage to one or more of our facilities could adversely affect
our ability to manufacture our products.
BD is a defendant in a number of pending lawsuits, including
purported class action lawsuits for alleged antitrust violations
and product liability, and could be subject to additional
lawsuits in the future. A more detailed description of these
lawsuits is contained in Item 3. Legal Proceedings. Given
the uncertain nature of litigation generally, we are 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 we
are a party. In view of these uncertainties, we could incur
charges in excess of any currently established accruals and, to
the extent available, excess liability insurance. Any such
future charges, individually or in the aggregate, could
adversely affect BD’s results of operations and cash flows.
The medical technology industry has experienced a significant
amount of consolidation. As a result of this consolidation,
competition to provide goods and services to customers has
increased. In addition, group purchasing organizations and
integrated health delivery networks have served to concentrate
purchasing decisions for some customers, which has placed
pricing pressure on medical device suppliers. Further
consolidation in the industry could exert additional pressure on
the prices of our products.
The design, manufacture and marketing of medical devices involve
certain inherent risks. Manufacturing or design defects,
unanticipated use of our products, or inadequate disclosure of
risks relating to the use of our products can lead to injury or
other adverse events. These events could lead to recalls or
safety alerts relating to our products (either voluntary or
required by the FDA or similar governmental authorities in other
countries), and could result, in certain cases, in the removal
of a product from the market. A recall could result in
significant costs, as well as negative publicity and damage to
our reputation that could reduce demand for our products.
Personal injuries relating to the use of our products can also
result in product liability claims
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being brought against us. In some circumstances, such adverse
events could also cause delays in new product approvals.
We are engaged in a project to upgrade our enterprise resource
planning (“ERP”) system. Our ERP system is critical to
our ability to accurately maintain books and records, record
transactions, provide important information to our management
and prepare our financial statements. The design and
implementation of the new ERP system has required, and will
continue to require, the investment of significant financial and
human resources. The total cost needed to implement the new ERP
system may turn out to be more than we currently anticipate. In
addition, we may not be able to successfully implement the new
ERP system without experiencing difficulties. Any disruptions,
delays or deficiencies in the design and implementation of the
new ERP system could adversely affect our ability to process
orders, ship products, provide services and customer support,
send invoices and track payments, fulfill contractual
obligations or otherwise operate our business.
BD is subject to extensive regulation by the FDA pursuant to the
Federal Food, Drug and Cosmetic Act, by comparable agencies in
foreign countries, and by other regulatory agencies and
governing bodies. Most of BD’s products must receive
clearance or approval from the FDA or
non-U.S. counterpart
regulatory agencies before they can be marketed or sold. The
process for obtaining marketing approval or clearance may take a
significant period of time and require the expenditure of
substantial resources, and these may be increasing. The process
may also require changes to our products or result in
limitations on the indicated uses of the products. Also,
governmental agencies may impose new requirements regarding
registration, labeling or prohibited materials that may require
us to modify or re-register products already on the market or
otherwise impact our ability to market our products. In
addition, once clearance or approval has been obtained for a
product, there is an obligation to ensure that all applicable
FDA and other regulatory requirements continue to be met.
Following the introduction of a product, these agencies also
periodically review our manufacturing processes and product
performance. Our failure to comply with the applicable good
manufacturing practices, adverse event reporting, clinical trial
and other requirements of these agencies could delay or prevent
the production, marketing or sale of our products and result in
fines, delays or suspensions of regulatory clearances, closure
of manufacturing sites, seizures or recalls of products and
damage to our reputation. Recent changes in enforcement practice
by the FDA and other agencies have resulted in increased
enforcement activity, which increases the compliance risk for BD
and other companies in our industry.
While our strategy to increase revenue growth is driven
primarily by internal product development, we seek to supplement
our growth through strategic acquisitions, investments and
alliances. Such transactions are inherently risky. The success
of any acquisition, investment or alliance may be affected by a
number of factors, including our ability to properly assess and
value the potential business opportunity or to successfully
integrate it into our existing business. There can be no
assurance that any past or future transaction will be successful.
BD operations outside the United States subject BD to certain
risks, including the effects of fluctuations in foreign currency
exchange (as discussed above); the spread of a global economic
downturn; changes in foreign regulatory requirements; local
product preferences; difficulty in establishing, staffing and
managing foreign operations; differing labor regulations;
changes in tax laws; potential political instability; trade
barriers; weakening of the protection of intellectual property
rights in some countries; and restrictions on the transfer of
capital across borders. The success of our operations outside
the United States will depend, in part, on our
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ability to acquire or form and maintain alliances with local
companies and make necessary infrastructure enhancements to,
among other things, our production facilities and distribution
networks.
Our BD Biosciences segment sells products to researchers at
pharmaceutical and biotechnology companies, academic
institutions, government laboratories and private foundations.
Research and development spending of our customers can fluctuate
based on spending priorities and general economic conditions. A
number of these customers are also dependent for their funding
upon grants from U.S. government agencies, such as the
U.S. National Institutes of Health (“NIH”) and
agencies in other countries. The level of government funding of
research and development is unpredictable. There have been
instances where NIH grants have been frozen or otherwise
unavailable for extended periods. The availability of
governmental research funding may also continue to be adversely
affected by the current economic downturn. Any reduction or
delay in governmental funding could cause our customers to delay
or forego purchases of our products.
Our
operations are dependent in part on patents and other
intellectual property assets.
Many of BD’s businesses rely on patent, trademark and other
intellectual property assets. While we do not believe that the
loss of any one patent or other intellectual property asset
would materially adversely affect BD operations, these
intellectual property assets, in the aggregate, are of material
importance to our business. BD can lose the protection afforded
by these intellectual property assets through patent
expirations, legal challenges or governmental action. Patents
attained by competitors, particularly as patents on our products
expire, may also adversely affect our competitive position. The
loss of a significant portion of our portfolio of intellectual
property assets may have an adverse effect on our earnings,
financial condition or cash flows. In addition, competitors may
claim that BD products infringe upon their intellectual
property. Resolving any intellectual property claim can be
costly and time-consuming.
Natural disasters (including pandemics), war, terrorism, labor
disruptions and international conflicts, and actions taken by
the United States and other governments in response to such
events, could cause significant economic disruption and
political and social instability in the United States and
in areas outside of the United States in which we operate.
These events could result in decreased demand for our products,
adversely affect our manufacturing and distribution
capabilities, or increase the costs for or cause interruptions
in the supply of materials from our suppliers.
Our ability to compete effectively depends upon our ability to
attract and retain executives and other key employees, including
people in technical, marketing, sales and research positions.
Competition for experienced employees, particularly for persons
with specialized skills, can be intense. BD’s ability to
recruit such talent will depend on a number of factors,
including compensation and benefits, work location and work
environment. If we cannot effectively recruit and retain
qualified executives and employees, our business could be
adversely affected.
None.
BD’s executive offices are located in Franklin Lakes, New
Jersey. As of November 1, 2010, BD owned and leased 184
facilities throughout the world comprising approximately
16,348,578 square feet of manufacturing, warehousing,
administrative and research facilities. The
U.S. facilities, including Puerto Rico, comprise
approximately 7,018,934 square feet of owned and
1,738,084 square feet of leased space. The international
facilities comprise approximately 6,287,633 square feet of
owned and 1,303,927 square feet of leased space. Sales
offices and distribution centers included in the total square
footage are also located throughout the world.
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Operations in each of BD’s business segments are conducted
at both U.S. and international locations. Particularly in
the international marketplace, facilities often serve more than
one business segment and are used for multiple purposes, such as
administrative/sales, manufacturing
and/or
warehousing/distribution. BD generally seeks to own its
manufacturing facilities, although some are leased. The
following table summarizes property information by business
segment.
BD believes that its facilities are of good construction and in
good physical condition, are suitable and adequate for the
operations conducted at those facilities, and are, with minor
exceptions, fully utilized and operating at normal capacity.
The U.S. facilities are located in Arizona, California,
Connecticut, Florida, Georgia, Illinois, Indiana, Maryland,
Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, North
Carolina, Pennsylvania, South Carolina, Tennessee, Texas,
Utah, Washington, DC, Washington, Wisconsin and Puerto Rico.
The international facilities are grouped as follows:
— Europe, which includes facilities in Austria,
Belgium, Denmark, England, Finland, France, Germany, Greece,
Hungary, Ireland, Italy, Kenya, Norway, Poland, Russia, Saudi
Arabia, South Africa, Spain, Sweden, Switzerland, Turkey and the
United Arab Emirates.
— Japan.
— Asia Pacific, which includes facilities in
Australia, China, India, Indonesia, Malaysia, New Zealand,
Pakistan, the Philippines, Singapore, South Korea, Taiwan,
Thailand and Vietnam.
— Latin America, which includes facilities in
Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and
Venezuela.
— Canada.
BD is named as a defendant in the following purported class
action suits brought on behalf of distributors and other
entities that purchase BD products (the “Distributor
Plaintiffs”), alleging that BD violated federal antitrust
laws, resulting in the charging of higher prices for BD’s
products to the plaintiffs and other purported class members.
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These actions have been consolidated under the caption “In
re Hypodermic Products Antitrust Litigation.”
BD is also named as a defendant in the following purported class
action suits brought on behalf of purchasers of BD’s
products, such as hospitals (the “Hospital
Plaintiffs”), alleging that BD violated federal and state
antitrust laws, resulting in the charging of higher prices for
BD’s products to the plaintiff and other purported class
members.
The plaintiffs in each of the above antitrust class action
lawsuits seek monetary damages. All of the antitrust class
action lawsuits have been consolidated for pre-trial purposes in
a Multi-District Litigation (MDL) in Federal court in New
Jersey.
On April 27, 2009, BD entered into a settlement agreement
with the Distributor Plaintiffs in these actions. The settlement
agreement provided for, among other things, the payment by BD of
$45 million in exchange for a release by all potential
class members of the direct purchaser claims under federal
antitrust laws related to the products and acts enumerated in
the complaint, and a dismissal of the case with prejudice,
insofar as it relates to direct purchaser claims. The release
would not cover potential class members that affirmatively opt
out of the settlement. On September 30, 2010, the court
issued an order denying a motion to approve the settlement
agreement, ruling that the Hospital Plaintiffs, and not the
Distributor Plaintiffs, are the direct purchasers entitled to
pursue damages under the federal antitrust laws for certain
sales of BD products. The settlement agreement currently remains
in effect, subject to certain termination provisions, and the
Distributor Plaintiffs are seeking appellate review of the
court’s order.
In June 2007, Retractable Technologies, Inc. (“RTI”)
filed a complaint against BD under the caption Retractable
Technologies, Inc. vs. Becton Dickinson and Company (Civil
Action No.
2:07-cv-250,
U.S. District Court, Eastern District of Texas). RTI
alleges that the BD
Integratm
syringes infringe patents licensed exclusively to RTI. In its
complaint, RTI also alleges that BD engaged in false advertising
with respect to certain of BD’s safety-engineered products
in violation of the Lanham Act; acted to exclude RTI from
various product markets and to maintain its market share
through, among other things, exclusionary contracts in violation
of state and federal antitrust laws; and engaged in unfair
competition. In January 2008, the court severed the patent and
non-patent claims into separate cases. RTI seeks money damages
and injunctive relief. On April 1, 2008, RTI filed a
complaint against BD under the caption Retractable
Technologies, Inc. and Thomas J. Shaw v. Becton Dickinson
and Company (Civil Action
No. 2:08-cv-141,
U.S. District Court, Eastern District of Texas). RTI
alleges that the BD
Integratm
syringes infringe another patent licensed exclusively to RTI.
RTI seeks money damages and injunctive relief. On
August 29, 2008, the court ordered the consolidation of the
patent cases. On November 9, 2009, at a trial of these
consolidated cases, the jury rendered a verdict in favor of RTI
on all but one of its infringement claims, but did not find any
willful infringement, and awarded RTI $5 million in
damages. On May 19, 2010, the court granted RTI’s
motion for a permanent injunction against the continued sale by
BD of its BD
Integratm
products in their current form, but stayed the injunction for
the longer of twelve months or the duration of any appeal. At
the same time, the court lifted a stay of RTI’s non-patent
claims that the court had imposed during the pendency of the
patent claims at the trial court level. On June 16, 2010,
BD filed its appeal with the Court of Appeals for the Federal
Circuit.
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On October 19, 2009, Gen-Probe Incorporated
(“Gen-Probe”) filed a patent infringement action
against BD in the U.S. District Court for the Southern
District of California. The complaint alleges that the BD
Vipertm
and BD
Vipertm
XTRtm
systems, and BD
ProbeTectm
specimen collection products infringe certain U.S. patents
of Gen-Probe. On March 23, 2010, Gen-Probe filed a
complaint, also in the U.S. District Court for the Southern
District of California, alleging that the BD
Maxtm
instrument infringes Gen-Probe patents. Additional disclosures
regarding this instrument are provided in Note 9 to the
consolidated financial statements contained in Item 8,
Financial Statements and Supplementary Data. The patents alleged
to be infringed are a subset of the Gen-Probe patents asserted
against BD in the October 2009 suit. On June 8, 2010, the
Court consolidated these cases. Gen-Probe is seeking monetary
damages and injunctive relief.
BD believes that it has meritorious defenses to each of the
above-mentioned suits pending against BD and is engaged in a
vigorous defense of each of these matters.
BD is also involved both as a plaintiff and a defendant in other
legal proceedings and claims that arise in the ordinary course
of business.
BD is a party to a number of federal proceedings in the United
States brought under the Comprehensive Environment Response,
Compensation and Liability Act, also known as
“Superfund,” and similar state laws. The affected
sites are in varying stages of development. In some instances,
the remedy has been completed, while in others, environmental
studies are commencing. For all sites, there are other
potentially responsible parties that may be jointly or severally
liable to pay all cleanup costs.
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 below, 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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The following is a list of the executive officers of BD, their
ages and all positions and offices held by each of them during
the past five years. There is no family relationship between any
executive officer or director of BD.
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PART II
BD’s common stock is listed on the New York Stock Exchange.
As of October 31, 2010, there were approximately
8,895 shareholders of record.
Market
and Market Prices of Common Stock (per common share)
Dividends
(per common share)
The table below sets forth certain information regarding
BD’s purchases of its common stock during the fiscal
quarter ended September 30, 2010.
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FIVE-YEAR
SUMMARY OF SELECTED FINANCIAL DATA
Becton, Dickinson and
Company
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FINANCIAL
REVIEW
Description
of the Company and Business Segments
Becton, Dickinson and Company (“BD”) is a global
medical technology company engaged principally in the
development, manufacture and sale of medical devices, instrument
systems and reagents used by healthcare institutions, life
science researchers, clinical laboratories, the pharmaceutical
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 and directly to end-users by
BD and independent sales representatives. References to years
throughout this discussion relate to our fiscal years, which end
on September 30.
Strategic
Objectives
BD remains focused on delivering sustainable growth and
shareholder value, while making appropriate investments for the
future. BD management operates the business consistent with the
following core strategies:
Our efforts to increase revenues and earnings per share are
focused on four specific areas within healthcare and life
sciences:
We continue to strive to improve the efficiency of our capital
structure and follow these guiding principles:
In assessing the outcomes of these strategies as well as
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, return on
invested capital, and cash flows.
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Financial
Results
Worldwide revenues in 2010 of $7.4 billion increased 5.5%
from the prior year and reflected volume increases of
approximately 6%, unfavorable foreign exchange translation of
0.1%, inclusive of hedge losses, and price decreases of 0.4%.
The increase is attributable to solid revenue growth in the
Medical Segment, continued improvement in Biosciences sales and,
to a lesser extent, growth in Diagnostics segment revenues.
U.S. revenues increased 5% to $3.3 billion. Sales in
the United States of safety-engineered devices grew 5% to
$1.11 billion in 2010 from $1.06 billion in 2009.
International revenues of $4.1 billion grew 6% compared
with the prior year. International sales of safety-engineered
devices grew 9.5% to $622 million in 2010 from
$568 million in 2009, which included an estimated 1.4% of
favorable foreign currency translation, net of hedge losses.
Operating income in 2010 grew 5.5% to $1.7 billion or 22.7%
of revenues, as compared with $1.6 billion, or 22.8% of
revenues in 2009. Operating income growth reflected an overall
unfavorable impact of foreign exchange translation, net of hedge
losses, as well as the absence of a $45 million litigation
charge recorded in 2009. The net unfavorable impact of these
items on operating income growth in 2010 was 330 basis
points.
Our financial position remains strong, with cash flows from
operating activities totaling $1.7 billion in 2010. At
September 30, 2010, we had $1.2 billion in cash and
equivalents and our
debt-to-capitalization
at September 30, 2010 was 23.7% compared with 26.8% at the
end of 2009. In 2010, BD’s cash outflows relating to
acquisitions included the purchase of HandyLab, Inc., a company
that develops and manufactures molecular diagnostic assays and
automation platforms, for $275 million in cash. Capital
expenditures were $537 million in 2010 as we continue to
invest in capacity across our segments to support future growth.
BD’s strong cash flow generation also provided the
flexibility to continue to return value to our shareholders in
the form of share repurchases and dividends. During 2010, we
repurchased 10.1 million shares of common stock for
$750 million and paid cash dividends to our shareholders
totaling $346 million. In November 2010, we issued
$700 million of
10-year
3.25% Notes and $300 million of
30-year
5.00% Notes, as discussed further below.
Our anticipated revenue growth over the next three years is
expected to come from business growth and expansion among all
segments and regions of the world, and the development in each
business segment of new products and services that provide
increased benefits to patients, healthcare workers and
researchers. 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 reform
initiatives. For example, the recently-enacted
U.S. healthcare reform legislation contains certain tax
provisions that will affect BD. The most significant impact is
the medical device excise tax, which imposes a 2.3% tax on
certain U.S. sales of medical devices, beginning in January
2013. Sales of BD products that we estimate to be subject to
this tax represented about 80% of BD’s total
U.S. revenues in fiscal year 2010. In addition, the new law
included a tax provision that eliminated the employer deduction
of the Medicare Part D retiree drug subsidy, and, as a
result, we recorded a charge of $9 million, or 4 cents per
share, in the second quarter of 2010.
We face currency exposure each reporting period that arises from
translating the results of our worldwide operations to the
U.S. dollar at exchange rates that fluctuate from the
beginning of such period. From time to time, we purchase forward
contracts and options to partially protect against adverse
foreign exchange rate movements. Gains or losses on our
derivative instruments are largely offset by the gains or losses
on the underlying hedged transactions. We do not enter into
derivative instruments for trading or speculative purposes.
During 2010, the U.S. dollar weakened against most foreign
currencies compared with rates during 2009. The resulting
favorable impact on worldwide revenues was offset by losses from
our hedging activities. For further discussion refer to
Note 12 to the consolidated financial statements contained
in Item 8, Financial Statements and Supplementary Data.
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During the fourth quarter of 2010, the Company sold the
Ophthalmic Systems unit, as well as the surgical blades,
critical care and extended dwell catheter product platforms of
the Medical Surgical Systems unit. Following the sale, prior
period Consolidated Statements of Income and Cash Flows were
restated to present separately the operating results of the
Ophthalmic Systems unit, surgical blade and critical care
product platforms as discontinued operations. See Note 10
to the consolidated financial statements contained in
Item 8, Financial Statements and Supplementary Data for
additional discussion. The results of operations associated with
the extended dwell catheter product platform are reported within
continuing operations, as the divestiture of this asset group
did not meet the criteria for discontinued operations.
Results
of Continuing Operations
Comparisons of income from continuing operations between 2010
and 2009 are affected by the following significant items that
are reflected in our 2010 financial results:
Medical revenues in 2010 of $3.8 billion increased
$239 million, or 6.7%, over 2009, which reflected an
estimated impact of favorable foreign currency translation of
0.5%, net of hedge losses.
The following is a summary of Medical revenues by organizational
unit:
Revenue growth in the Medical Surgical Systems unit continues to
be driven by sales of safety-engineered products and prefilled
flush syringes. Revenues of safety-engineered products increased
5% in the United States and 15% internationally, which included
an estimated favorable foreign exchange impact of 3%, net of
hedge losses. Revenue growth in the Diabetes Care unit resulted
primarily from continued strong growth in worldwide pen needle
sales and a co-marketing agreement in the United States. Revenue
growth in the Pharmaceutical Systems unit was driven by
double-digit growth in the United States, Japan and Asia
Pacific. Revenues related to the H1N1 pandemic grew
$15 million to $45 million for the Medical Surgical
Systems unit and grew $10 million to $35 million for
the Pharmaceutical Systems unit in 2010.
Medical operating income in 2010 was $1.1 billion, or 29.5%
of Medical revenues, as compared with $1.0 billion, or
29.5%, of revenues in 2009. Favorable manufacturing productivity
improvements were substantially offset by a slight decrease in
gross profit margin resulting from unfavorable foreign currency
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translation, a modest increase in the cost of raw materials, and
increased manufacturing
start-up and
restructuring costs. See further discussion on gross profit
margin below. Selling and administrative expense as a percentage
of Medical revenues in 2010 declined to 17.3% of revenues from
17.5% of revenues in 2009, primarily due to continued diligent
spending controls. Research and development expenses in 2010
increased $8 million, or 7%, and reflected continued
investment in the development of new products and platforms.
Diagnostics revenues in 2010 of $2.3 billion increased
$93 million, or 4.2%, over 2009, which reflected an
estimated impact of favorable foreign currency translation of
0.2%, net of hedge losses.
The following is a summary of Diagnostics revenues by
organizational unit:
Revenue growth in the Preanalytical Systems unit was driven by
sales of safety-engineered products. Sales of safety-engineered
products grew 5% in the United States, driven by BD
Vacutainertm
Push Button Blood Collection Set sales, and 7% internationally,
which included an estimated favorable foreign exchange impact of
1%, net of hedge losses. The Diagnostic Systems unit experienced
growth in worldwide sales of its automated diagnostic platforms,
including the molecular BD
ProbeTectm,
BD
Vipertm
and BD
Affirmtm
systems, along with solid growth of its BD
BACTECtm
blood culture and TB systems and the BD
Phoenixtm
ID/AST platform. Revenues related to the flu pandemic were
$13 million in 2010 compared with $22 million in 2009
for the Diagnostic Systems unit.
Diagnostics operating income in 2010 was $607 million, or
26.2% of Diagnostics revenues, compared with $607 million,
or 27.3% of revenues, in 2009. The Diagnostics segment
experienced a decline in gross profit margin that reflected
unfavorable foreign currency translation and
start-up
costs associated with acquisitions. This decline was partially
offset by sales growth of products that have higher overall
gross profit margins, in particular, safety-engineered products
and the BD
ProbeTectm
and BD
Vipertm
systems. See further discussion on gross profit margin below.
Selling and administrative expense as a percentage of
Diagnostics revenues remained the same in 2010 at 21.2%, due to
continued spending controls. Research and development expense
increased modestly over 2009 and reflected continued investment
in the development of new products and platforms with particular
emphasis on our molecular platforms.
Biosciences revenues in 2010 of $1.3 billion increased
$53 million, or 4.4%, over 2009, which reflected an
estimated impact of unfavorable foreign currency translation of
2.4% due to hedge losses. Biosciences revenues reflected a
larger portion of our hedge losses, which are allocated to the
segments based on their proportionate share of international
sales of
U.S.-produced
products.
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The following is a summary of Biosciences revenues by
organizational unit:
Revenue growth in the Cell Analysis unit reflected increased
demand for instruments and reagents and was aided by
governmental economic stimulus programs for research in the
U.S. as well as supplemental government funding in Japan.
Revenue growth in the Discovery Labware unit reflected increased
sales to major biopharmaceutical customers, offset by reduced
private label sales compared with 2009.
Biosciences operating income in 2010 was $354 million, or
28.2% of Biosciences revenues, compared with $362 million,
or 30.1%, in 2009. The decrease in operating income, as a
percentage of revenues, reflects lower gross profit from the
unfavorable impact of hedge losses, partially offset by the
favorable impact of foreign currency translation. Selling and
administrative expense was 21.9% in 2010 as compared with 21.6%
in 2009 and reflected new direct selling programs and
inflationary factors. Research and development expense increased
$10 million, or 11% and reflected spending on new product
development and advanced technology.
Revenues in the United States in 2010 of $3.3 billion
increased 5%. Overall, growth was led by sales of
safety-engineered products, which increased 5% to
$1.11 billion from $1.06 billion in 2009, as well as
sales of Diabetes Care products. Revenue growth also reflected
sales of immunocytometry instruments and reagents, aided by
governmental economic stimulus programs in the U.S.
International revenues in 2010 of $4.1 billion increased
6%, and reflected nominal impact from net foreign currency
translation. Sales growth was led by double-digit growth in Asia
Pacific, Latin America and Japan. International sales of
safety-engineered devices grew 9.5% to $622 million in 2010
from $568 million in 2009, which included an estimated
impact of net favorable foreign currency translation of 1.4%.
Sales growth in Western Europe was unfavorably impacted by
continuing adverse macroeconomic conditions and an unfavorable
comparison to 2009, which included flu-related sales that did
not reoccur in 2010.
Gross profit margin was 51.9% in 2010, compared with 52.6% in
2009. Gross profit margin in 2010 reflected an estimated
unfavorable impact primarily from hedging activity of
90 basis points. Partially offsetting these losses was a
net favorable operating performance impact of 20 basis
points. Operating performance reflected higher sales of products
with higher gross margins, partially offset by higher
manufacturing
start-up and
restructuring costs, higher pension costs, and increases in
certain raw material costs.
Selling and administrative expense in 2010 of $1.7 billion,
or 23.3% of revenues, increased $41 million, or 2%,
compared with $1.7 billion, or 24.1% of revenues, in 2009.
This increase reflected $32 million of unfavorable foreign
currency translation. Increased spending in 2010 included
$18 million in core spending, $16 million related to
our global enterprise resource planning initiative to update our
business information systems, and $15 million in pension
costs. Aggregate expenses for 2009 reflected the
$45 million litigation charge previously discussed.
Research and development (“R&D”) expense in 2010
was $431 million, or 5.8% of revenues, compared with
$405 million, or 5.8% of revenues, in 2009. The increase in
R&D expenditures includes spending for new products and
platforms in each of our segments, as previously discussed.
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Interest expense in 2010 was $51 million, compared with
$40 million in 2009. This increase reflected higher levels
of long-term fixed rate debt, partially offset by lower interest
rates on floating rate debt and a benefit from higher levels of
capitalized interest. Interest income was $35 million in
2010, compared with $33 million in 2009. This increase
resulted primarily from higher investment levels. Other income
(expense), net in 2010 included the gain recognized on the sale
of the extended dwell catheter product platform of
$18 million and a write-down of investments of
$14 million.
The effective tax rate in 2010 of 29.2% was higher compared with
the 2009 rate of 26.1% and reflected the unfavorable impact of
certain unusual items. The 2010 rate was unfavorably impacted by
0.6 percentage points from the expiration of the R&D
tax credit, and by 0.5 percentage points from the non-cash
charge related to healthcare reform impacting Medicare
Part D reimbursements. In addition, the 2009 rate reflected
a 1.2 percentage point benefit due to various tax
settlements in multiple jurisdictions.
Income from continuing operations and diluted earnings per share
from continuing operations in 2010 were $1.2 billion and
$4.90, respectively. The non-cash charge related to healthcare
reform decreased income from continuing operations and diluted
earnings per share from continuing operations in 2010 by
$9 million, or 4 cents, respectively. The current
year’s earnings also reflected an overall net unfavorable
impact of foreign exchange fluctuations of 26 cents, including
hedge losses. Income from continuing operations and diluted
earnings per share from continuing operations in 2009 were
$1.2 million and $4.73, respectively. The tax benefit
discussed above increased income from continuing operations and
diluted earnings per share from continuing operations in 2009 by
$20 million, or 8 cents, respectively. The litigation
charge discussed above decreased income from continuing
operations and diluted earnings per share from continuing
operations in 2009 by $28 million, or 11 cents,
respectively.
We selectively use financial instruments to manage market risk,
primarily foreign currency exchange risk and interest rate risk
relating to our ongoing business operations. The counterparties
to these contracts are highly rated financial institutions. We
do not enter into financial instruments for trading or
speculative purposes.
Foreign
Exchange Risk
BD and its subsidiaries transact business in various foreign
currencies throughout Europe, Asia Pacific, Canada, Japan and
Latin America. We face foreign currency exposure from the effect
of fluctuating exchange rates on payables and receivables
relating to transactions that are denominated in currencies
other than our functional currency. These payables and
receivables primarily arise from intercompany transactions. We
hedge substantially all such exposures, primarily through the
use of forward contracts. We also face currency exposure that
arises from translating the results of our worldwide operations,
including sales, to the U.S. dollar at exchange rates that
have fluctuated from the beginning of a reporting period. From
time to time, we purchase forward contracts and options to hedge
certain forecasted sales that are denominated in foreign
currencies in order to partially protect against a reduction in
the value of future sales resulting from adverse foreign
exchange rate movements. Gains or losses on our derivative
instruments are largely offset by the gains or losses on the
underlying hedged transactions.
Derivative financial instruments are recorded on our balance
sheet at fair value. For foreign currency derivatives, market
risk is determined by calculating the impact on fair value of an
assumed change in foreign exchange rates relative to the
U.S. dollar. Fair values were estimated based upon
observable inputs, specifically spot currency rates and foreign
currency prices for similar assets and liabilities. With respect
to the derivative instruments outstanding at September 30,
2010, a 10% appreciation of the U.S. dollar over a one-year
period
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would decrease pre-tax earnings by $30 million, while a 10%
depreciation of the U.S. dollar would increase pre-tax
earnings by $30 million. Comparatively, considering our
derivative instruments outstanding at September 30, 2009, a
10% appreciation of the U.S. dollar over a one-year period
would have increased pre-tax earnings by $85 million, while
a 10% depreciation of the U.S. dollar would have decreased
pre-tax earnings by $85 million. These calculations do not
reflect the impact of exchange gains or losses on the underlying
transactions that would substantially offset the results of the
derivative instruments.
Interest
Rate Risk
Our primary interest rate exposure results from changes in
short-term U.S. dollar interest rates. Our debt and
interest-bearing investments at September 30, 2010 are
substantially all U.S. dollar-denominated. Therefore,
transaction and translation exposure relating to such
instruments is minimal. When managing interest rate exposures,
we strive to achieve an appropriate balance between fixed and
floating rate instruments. We may enter into interest rate swaps
to help maintain this balance and manage debt and
interest-bearing investments in tandem, since these items have
an offsetting impact on interest rate exposure. For interest
rate derivative instruments, fair values are provided by the
financial institutions that are counterparties to these
arrangements. Market risk for these instruments is determined by
calculating the impact to fair value of an assumed change in
interest rates across all maturities. A change in interest rates
on short-term debt and interest-bearing investments impacts our
earnings and cash flow, but not the fair value of these
instruments because of their limited duration. A change in
interest rates on long-term debt is assumed to impact the fair
value of the debt, but not our earnings or cash flow because the
interest on such obligations is fixed. Based on our overall
interest rate exposure at September 30, 2010 and 2009, a
change of 10% in interest rates would not have a material effect
on our earnings or cash flows over a one-year period. An
increase of 10% in interest rates would decrease the fair value
of our long-term debt and interest rate swaps at
September 30, 2010 and 2009 by approximately
$56 million and $66 million, respectively. A 10%
decrease in interest rates would increase the fair value of our
long-term debt and interest rate swaps at September 30,
2010 and 2009 by approximately $59 million and
$71 million, respectively.
Net cash provided by continuing operating activities in 2010 was
$1.7 billion, unchanged from 2009. The change in operating
assets and liabilities resulted from a net use of cash and
reflected higher levels of accounts receivable and inventory.
Net cash provided by continuing operating activities was reduced
by discretionary cash contributions to the U.S. pension
plan of $175 million and $75 million in 2010 and 2009,
respectively.
Capital
Expenditures
Capital expenditures were $537 million in 2010, compared
with $585 million in 2009. Capital spending for the
Medical, Diagnostics and Biosciences segments in 2010 was
$369 million, $109 million and $50 million,
respectively, and related primarily to manufacturing capacity
expansions.
Acquisitions
of Businesses
In November 2009, we acquired 100% of the outstanding shares of
HandyLab, Inc., a company that develops and manufactures
molecular diagnostic assays and automation platforms, for a net
cash payment of $275 million. For further discussion refer
to Note 9 to the consolidated financial statements
contained in Item 8, Financial Statements and Supplementary
Data.
Divestiture
of Businesses
On July 30, 2010, the Company sold the Ophthalmic Systems
unit and the surgical blades platform. The sale of the critical
care and extended dwell catheter product platforms was completed
on September 30, 2010.
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Cash proceeds received in the fourth quarter 2010 from these
divestitures were $260 million, net of working capital
adjustments. For further discussion refer to Note 10 to the
consolidated financial statements contained in Item 8,
Financial Statements and Supplementary Data.
Debt
Issuances and Payments of Obligations
The change in short-term debt reflected the repayment of
$200 million of 7.15% Notes, due October 1, 2009,
using the proceeds from the issuance of $500 million of
10-year,
5.00% Notes and $250 million of
30-year,
6.00% Notes in May 2009. Short-term debt decreased to 12%
of total debt at the end of 2010, from 21% at the end of 2009.
Floating rate debt was 24% of total debt at the end of 2010 and
32% at the end of 2009. Our weighted average cost of total debt
at the end of 2010 was 4.6%, down from 4.9% at the end of 2009.
Debt-to-capitalization
(ratio of total debt to the sum of total debt,
shareholders’ equity and net non-current deferred income
tax liabilities) at September 30, 2010 was 23.7% compared
to 26.8% at September 30, 2009.
On November 8, 2010, we issued $700 million of
10-year
3.25% Notes and $300 million of
30-year
5.00% Notes. The net proceeds from these issuances are
expected to be used for general corporate purposes, which may
include funding for working capital, capital expenditures,
repurchases of our common stock and acquisitions.
Repurchase
of Common Stock
We repurchased approximately 10.1 million shares of our
common stock for $750 million in 2010 and 8.2 million
shares for $550 million in 2009. In September 2010, our
Board of Directors authorized the repurchase of an additional
21 million shares. When combined with the remaining shares
under the November 2009 Board of Directors’ repurchase
authorization, there is a total of approximately 29 million
common shares available for purchase at September 30, 2010.
We plan on share repurchases of $1.5 billion in 2011 and
$600 million in 2012, which are expected to be funded by
cash flows from operating activities and the issuance of debt.
Credit
Facilities
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 September 30, 2010. We
maintain a $1 billion 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 December 2012 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 26-to-1 to 34-to-1. There were no borrowings
outstanding under this facility at September 30, 2010. In
addition, we have informal lines of credit outside the United
States.
Access
to Capital and Credit Ratings
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.
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BD’s credit ratings at September 30, 2010 were as
follows:
While deterioration in BD’s credit ratings would increase
the costs associated with maintaining and borrowing under its
existing credit arrangements, such a downgrade would not affect
its ability to draw on these credit facilities, nor would it
result in an acceleration of the scheduled maturities of any
outstanding debt. BD believes that given its debt ratings, its
conservative financial management policies, its ability to
generate cash flow and the non-cyclical, geographically
diversified nature of its businesses, it would have access to
additional short-term and long-term capital should the need
arise.
In the normal course of business, we enter into contracts and
commitments that obligate us to make payments in the future. The
table below sets forth BD’s significant contractual
obligations and related scheduled payments:
2009
Compared With 2008
Results
of Continuing Operations
Worldwide revenues in 2009 of $7.0 billion increased 1%
from 2008 and reflected volume increases of approximately 5%,
and price increases of less than 1%, which were partially offset
by net unfavorable foreign currency translation of 4%, after
factoring in hedge gains.
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Comparisons of income from continuing operations between 2009
and 2008 are affected by the following significant items that
are reflected in our 2009 financial results:
Medical revenues in 2009 of $3.6 billion increased
$14 million, or 0.4%, over 2008, as volume growth was
mostly offset by an estimated impact of unfavorable foreign
currency translation of 5.5 percentage points, net of hedge
gains.
The following is a summary of Medical revenues by organizational
unit:
On a foreign currency-neutral basis, revenue growth of the
Medical Surgical Systems unit continued to be driven by sales in
safety-engineered products and prefilled flush syringes.
Revenues of safety-engineered products increased 2% in the
United States and 12% internationally, which included an
estimated unfavorable foreign exchange impact of 11%, net of
hedge gains. Revenue growth in the Diabetes Care unit resulted
primarily from worldwide pen needle sales. Revenue growth in the
Pharmaceutical Systems unit was driven by growth in Europe and
Asia Pacific, offset by lower sales in the United States when
compared with 2008, which included non-recurring sales to
companies producing certain generic heparin products. Revenues
related to the H1N1 pandemic were $30 million for the
Medical Surgical Systems unit and $25 million for the
Pharmaceutical Systems unit in 2009.
Medical operating income in 2009 was $1.0 billion, or 29.5%
of Medical revenues, as compared with $1.0 billion, or
28.4% of revenues, in 2008. Operating income as a percentage of
revenues reflected an increase in gross profit margin primarily
resulting from favorable currency translation, including hedge
gains, and a modest benefit from lower raw materials cost, which
was partially offset by increased manufacturing
start-up
costs. See further discussion on gross profit margin below.
Selling and administrative expense as a percentage of Medical
revenues in 2009 declined to 17.5% of revenues, from 17.9% of
revenues in 2008, primarily due to tight spending controls.
Research and development expenses in 2009 increased
$16 million, or 15%, reflecting continued investment in the
development of new products and platforms.
Diagnostics revenues in 2009 of $2.2 billion increased
$66 million, or 3%, over 2008. Revenues in 2009 reflected
an estimated unfavorable impact of foreign currency translation
of 4 percentage points, net of hedge gains.
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The following is a summary of Diagnostics revenues by
organizational unit:
Revenue growth in the Preanalytical Systems unit was driven by
sales of safety-engineered products. Sales of safety-engineered
products grew 6% in the United States, driven by BD
VacutainerTM
Push Button Blood Collection Set sales, and 4% internationally,
which included an estimated unfavorable foreign exchange impact
of 10%, net of hedge gains. The Diagnostic Systems unit
experienced growth in worldwide sales of its automated
diagnostic platforms, including the molecular BD
ProbeTecTM,
BD
ViperTM
and BD
AffirmTM
systems, along with solid growth of its BD
BACTECTM
blood culture and TB systems and the BD
PhoenixTM
ID/AST platform. Revenues of flu-related products were
$22 million in 2009. In addition, revenues from TriPath
grew $11 million to $130 million and revenues from
GeneOhm grew $9 million to $51 million in 2009.
Diagnostics operating income was $607 million, or 27.3% of
Diagnostics revenues, in 2009, compared with $526 million,
or 24.3% of revenues, in 2008. The Diagnostics Segment
experienced an improvement in gross profit margin from sales
growth of products that have higher overall gross profit
margins, in particular, safety-engineered products and the BD
ProbeTecTM
and BD
ViperTM
systems. This was partially offset by increases in raw material
costs and unfavorable foreign exchange. See further discussion
on gross profit margin below. Selling and administrative expense
as a percentage of Diagnostics revenues in 2009 was 21.2%,
compared with 22.0% in 2008, primarily due to tight spending
controls. Research and development expense increased
$10 million, or 7%, reflecting continued investment in the
development of new products and platforms, with particular
emphasis on our molecular platforms.
Biosciences revenues in 2009 of $1.2 billion increased
$9 million, or 1%, over 2008, which reflected an estimated
impact of unfavorable foreign currency translation of
1 percentage point, net of hedge gains.
The following is a summary of Biosciences revenues by
organizational unit:
Revenue growth in the Cell Analysis unit reflected lessening
demand for instruments and research reagents, caused primarily
by adverse economic conditions in the U.S. that resulted in
funding constraints and lower demand for capital equipment. The
unit was also impacted by reduced research spending in other
regions. Revenue growth in the Discovery Labware unit was
adversely impacted by reduced sales to a major bionutrients
customer compared with 2008. Biosciences revenues reflected a
larger portion of our hedge gains, which are allocated to the
segments based on their proportionate share of international
sales of
U.S.-produced
products.
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Biosciences operating income in 2009 was $362 million, or
30.1% of Biosciences revenues, compared with $334 million,
or 27.9%, in 2008. The increase in operating income, as a
percentage of revenues, reflects gross profit improvement from
the favorable impact of foreign currency translation, including
hedge gains. See further discussion on gross profit margin
below. In addition, selling and administrative expense as a
percentage of Biosciences revenues declined in 2009 to 21.6%
from 23.0% in 2008, primarily due to tight spending controls.
Research and development expense in 2009 was flat compared with
2008.
Revenues in the United States in 2009 of $3.1 billion
increased 3%. Overall, growth was led by sales of
safety-engineered products, which increased 4% to
$1.1 billion, as well as sales of Diabetes Care products.
Revenue growth was adversely impacted by lower sales of
immunocytometry instruments and reagents and Pharmaceutical
Systems products, as previously discussed.
International revenues in 2009 of $3.9 billion were
relatively flat compared with 2008, as increased sales volume
was offset by an estimated impact of unfavorable foreign
currency translation of 7 percentage points, net of hedge
gains. Volume growth was led by sales in Western Europe, Asia
Pacific and Latin America. International sales of
safety-engineered devices grew 6.5% to $568 million in 2009
from $533 million in 2008 and reflected an estimated
10 percentage points of unfavorable foreign currency
translation.
Gross profit margin increased to 52.6% in 2009, from 51.3% in
2008. Gross profit margin in 2009 reflected an estimated
favorable impact of 140 basis points from both foreign
currency translation and the hedging of certain foreign
currencies and 20 basis points from lower raw materials
cost. Partially offsetting these gains were increases in
manufacturing
start-up
costs of approximately 30 basis points.
Selling and administrative expense in 2009 was
$1.7 billion, or 24.1% of revenues, compared with
$1.7 billion, or 24.2% of revenues, in 2008. Aggregate
expenses reflected the $45 million litigation charge
previously discussed and $48 million of increased core
spending. These increases were partially offset by
$82 million of favorable foreign exchange impacts.
R&D expense in 2009 was $405 million, or 5.8% of
revenues, compared with $383 million, or 5.5% of revenues,
in 2008. The increase in R&D expenditures includes spending
for new products and platforms in the Medical and Diagnostics
segments, as previously discussed.
Operating margin in 2009 was 22.8% of revenues, compared with
21.6% in 2008. The litigation charge noted above decreased
operating margin in 2009 by 60 basis points.
Interest expense was $40 million in 2009, compared with
$36 million in 2008. This increase reflected higher debt
levels offset, in part, by lower interest rates on floating rate
debt. Interest income was $33 million in 2009, compared
with $39 million in 2008. This decrease was primarily
attributable to the impact of lower interest rates on floating
rate investments.
The effective tax rate in 2009 was 26.1% compared with the 2008
rate of 27.7%, and reflected a 1.2% benefit due to various tax
settlements in multiple jurisdictions.
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Income from continuing operations and diluted earnings per share
from continuing operations in 2009 were $1.2 billion and
$4.73, respectively. The tax benefit discussed above increased
income from continuing operations and diluted earnings per share
from continuing operations in 2009 by $20 million, or 8
cents, respectively. The litigation charge discussed above
decreased income from continuing operations and diluted earnings
per share from continuing operations in 2009 by
$28 million, or 11 cents, respectively. Income from
continuing operations and diluted earnings per share from
continuing operations in 2008 were $1.1 million and $4.27,
respectively.
Discontinued
Operations
In July 2009, the Company sold certain assets and liabilities
related to the elastics and thermometer components of the Home
Healthcare product line of the Medical segment for
$51 million. See Note 10 to the consolidated financial
statements contained in Item 8, Financial Statements and
Supplementary Data for additional discussion.
Net
Cash Flows from Continuing Operating
Activities
Net cash provided by continuing operating activities in 2009 was
$1.7 billion, compared with $1.6 billion in 2008. Net
income, excluding non-cash items (primarily depreciation,
amortization, share-based compensation and deferred income
taxes), was the primary source of operating cash flow during
2009. The change in operating assets and liabilities was a net
use of cash and reflected higher levels of accounts receivable
and inventory.
Net
Cash Flows from Continuing Investing
Activities
Net cash used for continuing investing activities in 2009 was
$1.1 billion, compared with $777 million in 2008.
Capital expenditures were $585 million in 2009, compared
with $596 million in 2008. Capital spending for the
Medical, Diagnostics and Biosciences segments was
$408 million, $102 million and $56 million,
respectively, in 2009 and related primarily to manufacturing
capacity expansions. The increase in cash used for purchases of
short-term investments is primarily related to the temporary
investment of proceeds from the long-term debt issuance
discussed below. The increase in cash used for capital software
investment is primarily related to our global enterprise
resource planning initiative to upgrade our business information
systems.
Net
Cash Flows from Continuing Financing
Activities
Net cash used for financing activities was $80 million in
2009, as compared with $586 million in 2008. In May 2009,
we issued $500 million of
10-year,
5.00% Notes and $250 million of
30-year,
6.00% Notes, the proceeds of which were used to repay
$200 million of 7.15% Notes, due October 1, 2009,
to fund a discretionary pension contribution of
$175 million in October 2009, and for general corporate
purposes. Total debt was $1.9 billion and $1.2 billion
at September 30, 2009 and 2008, respectively. Short-term
debt increased to 21% of total debt at the end of 2009, from 17%
at the end of 2008. Floating rate debt was 32% of total debt at
the end of 2009 and 35% at the end of 2008. Our weighted average
cost of total debt at the end of 2009 was 4.9%, unchanged from
the end of 2008.
Debt-to-capitalization
at the end of 2009 increased to 26.8% compared with 18.8% in
2008, primarily due to our debt issuance.
The preparation of the consolidated financial statements
requires management to use estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and
expenses, as well as the disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements. Some of those judgments can be subjective and
complex and, consequently, actual results could differ from
those estimates. Management bases its estimates and judgments on
historical experience and on various other factors
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that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. For any given estimate or
assumption made by management, it is possible that other people
applying reasonable judgment to the same facts and circumstances
could develop different estimates. Actual results that differ
from management’s estimates could have an unfavorable
effect on our consolidated financial statements. Management
believes the following critical accounting policies reflect the
more significant judgments and estimates used in the preparation
of the consolidated financial statements:
Revenue from product sales is typically recognized when title
and risk of loss pass to the customer. However, we recognize
revenue for certain instruments sold from the Biosciences
segment upon installation at a customer’s site, as
installation of these instruments is considered a significant
post-delivery obligation. In addition, for certain sales
arrangements, primarily in the U.S., with multiple deliverables,
revenue and cost of products sold are recognized at the
completion of each deliverable: shipment, installation and
training. These sales agreements are divided into separate units
of accounting and revenue is recognized upon the completion of
each deliverable based on the relative fair values of items
delivered. Fair values are generally determined based on sales
of the individual deliverables to third parties.
BD’s domestic businesses sell products primarily to
distributors who resell the products to end-user customers. We
provide rebates to distributors that sell to end-user customers
at prices determined under a contract between BD and the
end-user customer. Provisions for rebates, as well as sales
discounts and returns, are accounted for as a reduction of
revenues when revenue is recognized.
Goodwill and indefinite-lived intangible assets are subject to
impairment reviews at least annually, or whenever indicators of
impairment arise. Potential impairment is identified by
comparing the fair value of a reporting unit with its carrying
value. Our annual goodwill impairment test for 2010 did not
result in an impairment, as the fair value of each reporting
unit exceeded its carrying value. Intangible assets other than
goodwill and indefinite-lived intangible assets and other
long-lived assets are reviewed annually for impairment, or when
impairment indicators are present. Impairment reviews are based
on an income approach which is based on the present value of
future cash flows. This approach requires significant management
judgment with respect to future volume, revenue and expense
growth rates, changes in working capital use, appropriate
discount rates and other assumptions and estimates. The
estimates and assumptions used are consistent with BD’s
business plans. The use of alternative estimates and assumptions
could increase or decrease the estimated fair value of the
asset, and potentially result in different impacts to BD’s
results of operations. Actual results may differ from
management’s estimates.
BD maintains valuation allowances where it is more likely than
not that all or a portion of a deferred tax asset will not be
realized. Changes in valuation allowances are included in our
tax provision in the period of change. In determining whether a
valuation allowance is warranted, management evaluates factors
such as prior earnings history, expected future earnings, carry
back and carry forward periods, and tax strategies that could
potentially enhance the likelihood of realization of a deferred
tax asset.
BD conducts business and files tax returns in numerous countries
and currently has tax audits in progress in a number of tax
jurisdictions. In evaluating the exposure associated with
various tax filing positions, we record reserves for uncertain
tax positions based on the technical support for the positions,
our past audit experience with similar situations, and the
potential interest and penalties related to the matters.
BD’s effective tax rate in any given period could be
impacted if, upon resolution with taxing authorities, we
prevailed in positions for which reserves have been established,
or we were required to pay amounts in excess of established
reserves.
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We are involved, both as a plaintiff and a defendant, in various
legal proceedings that arise in the ordinary course of business,
including, without limitation, product liability, antitrust and
environmental matters, as further discussed in Note 5 to
the consolidated financial statements contained in Item 8,
Financial Statements and Supplementary Data. We assess the
likelihood of any adverse judgments or outcomes to these matters
as well as potential ranges of probable losses. We establish
accruals to the extent probable future losses are estimable (in
the case of environmental matters, without considering possible
third-party recoveries). A determination of the amount of
accruals, if any, for these contingencies is made after careful
analysis of each individual issue and, when appropriate, is
developed after consultation with outside counsel. The accruals
may change in the future due to new developments in each matter
or changes in our strategy in dealing with these matters.
Given the uncertain nature of litigation generally, we are 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 we are a party. In view of these uncertainties, we could
incur charges in excess of any currently established accruals
and, to the extent available, excess liability insurance.
Accordingly, 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 net cash flows.
We have significant net pension and other postretirement benefit
costs that are measured using actuarial valuations. Pension
benefit costs include assumptions for the discount rate and
expected return on plan assets. Other postretirement benefit
plan costs include assumptions for the discount rate and
healthcare cost trend rates. These assumptions have a
significant effect on the amounts reported. In addition to the
analysis below, see Note 8 to the consolidated financial
statements contained in Item 8, Financial Statements and
Supplementary Data for additional discussion.
The discount rate is selected each year based on investment
grade bonds and other factors as of the measurement date
(September 30). For the U.S. pension plan, we used a
discount rate of 5.2% as of September 30, 2010, which was
based on an actuarially-determined, company-specific yield
curve. The rate selected is used to measure liabilities as of
the measurement date and for calculating the following
year’s pension expense. The expected long-term rate of
return on plan assets assumption, although reviewed each year,
changes less frequently due to the long-term nature of the
assumption. This assumption does not impact the measurement of
assets or liabilities as of the measurement date; rather, it is
used only in the calculation of pension expense. To determine
the expected long-term rate of return on pension plan assets, we
consider many factors, including our historical assumptions
compared with actual results; benchmark data; expected returns
on various plan asset classes, as well as current and expected
asset allocations. At September 30, 2010, we used a
long-term expected rate of return on plan assets assumption of
8.00% for the U.S. pension plan. We believe our discount
rate and expected long-term rate of return on plan assets
assumptions are appropriate based upon the above factors.
Sensitivity to changes in key assumptions for our
U.S. pension and other postretirement plans are as follows:
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Compensation cost relating to share-based payment transactions
is recognized in net income using a fair value measurement
method. All share-based payments to employees, including grants
of employee stock options, are recognized in the statement of
operations as compensation expense (based on their fair values)
over the vesting period of the awards. We determine the fair
value of certain share-based awards using a lattice-based
binomial option valuation model that incorporates certain
assumptions, such as the risk-free interest rate, expected
volatility, expected dividend yield and expected life of the
options. See Note 7 to the consolidated financial
statements contained in Item 8, Financial Statements and
Supplementary Data for additional discussion.
BD and its representatives may from time to time make certain
forward-looking statements in publicly released materials, both
written and oral, including statements contained in filings with
the Securities and Exchange Commission, press releases, and our
reports to shareholders. Forward-looking statements may be
identified by the use of words such as “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, cash flows
or uses, and statements expressing views about future operating
results — are forward-looking statements.
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 after the date they are
made, whether as a result of new information, future events and
developments or otherwise, except as required by applicable law
or regulations.
The following are some important factors that could cause our
actual results to differ from our expectations in any
forward-looking statements. For further discussion of certain of
these factors, see Item 1A. Risk Factors.
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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.
The information required by this item is included in
Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and in
Notes 1, 12 and 13 to the consolidated financial statements
contained in Item 8, Financial Statements and Supplementary
Data, and is incorporated herein by reference.
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Reports
of Management
The following financial statements have been prepared by
management in conformity with U.S. generally accepted
accounting principles and include, where required, amounts based
on the best estimates and judgments of management. The integrity
and objectivity of data in the financial statements and
elsewhere in this Annual Report are the responsibility of
management.
In fulfilling its responsibilities for the integrity of the data
presented and to safeguard the Company’s assets, management
employs a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that the
Company’s assets are protected and that transactions are
appropriately authorized, recorded and summarized. This system
of control is supported by the selection of qualified personnel,
by organizational assignments that provide appropriate
delegation of authority and division of responsibilities, and by
the dissemination of written policies and procedures. This
control structure is further reinforced by a program of internal
audits, including a policy that requires responsive action by
management.
The Board of Directors monitors the internal control system,
including internal accounting and financial reporting controls,
through its Audit Committee, which consists of seven independent
Directors. The Audit Committee meets periodically with the
independent registered public accounting firm, the internal
auditors and management to review the work of each and to
satisfy itself that they are properly discharging their
responsibilities. The independent registered public accounting
firm and the internal auditors have full and free access to the
Audit Committee and meet with its members, with and without
management present, to discuss the scope and results of their
audits including internal control, auditing and financial
reporting matters.
Management’s
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rule 13a-15(f)
under the Securities Act of 1934. Management conducted an
assessment of the effectiveness of internal control over
financial reporting based on the criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment and those criteria, management
concluded that internal control over financial reporting was
effective as of September 30, 2010.
The financial statements and internal control over financial
reporting have been audited by Ernst & Young LLP, an
independent registered public accounting firm. Ernst &
Young’s reports with respect to fairness of the
presentation of the statements, and the effectiveness of
internal control over financial reporting, are included herein.
Table of Contents
Report
of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Becton, Dickinson and Company
We have audited the accompanying consolidated balance sheets of
Becton, Dickinson and Company as of September 30, 2010 and
2009, and the related consolidated statements of income,
comprehensive income, and cash flows for each of the three years
in the period ended September 30, 2010. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Becton, Dickinson and Company at
September 30, 2010 and 2009, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended September 30, 2010, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Becton, Dickinson and Company’s internal control over
financial reporting as of September 30, 2010, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated November 24, 2010
expressed an unqualified opinion thereon.
/s/ Ernst &
Young LLP
New York, New York
November 24, 2010
Table of Contents
Report
of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Becton, Dickinson and Company
We have audited Becton, Dickinson and Company’s internal
control over financial reporting as of September 30, 2010,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Becton, Dickinson and Company’s management is responsible
for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Becton, Dickinson and Company maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2010, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Becton, Dickinson and Company as
of September 30, 2010 and 2009, and the related
consolidated statements of income, comprehensive income, and
cash flows for each of the three years in the period ended
September 30, 2010 of Becton, Dickinson and Company, and
our report dated November 24, 2010 expressed an unqualified
opinion thereon.
/s/ Ernst &
Young LLP
New York, New York
November 24, 2010
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Becton,
Dickinson and Company
Consolidated
Statements of Income
See notes to consolidated financial statements
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Becton,
Dickinson and Company
See notes to consolidated financial statements
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Becton,
Dickinson and Company
Consolidated
Balance Sheets
See notes to consolidated financial statements
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Becton,
Dickinson and Company
Consolidated
Statements of Cash Flows
See notes to consolidated financial statements
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Becton,
Dickinson and Company
Notes to
Consolidated Financial Statements
Thousands
of dollars, except per share amounts and numbers of
shares
Note 1 —
Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of
Becton, Dickinson and Company and its majority-owned
subsidiaries (the “Company”) after the elimination of
intercompany transactions. The Company has no material interests
in variable interest entities.
Cash equivalents consist of all highly liquid investments with a
maturity of three months or less at time of purchase.
Short-term investments consist of time deposits with maturities
greater than three months and less than one year when purchased.
Inventories
Inventories are stated at the lower of
first-in,
first-out cost or market.
Property, plant and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and
amortization are principally provided on the straight-line basis
over estimated useful lives, which range from 20 to
45 years for buildings, four to 10 years for machinery
and equipment and one to 20 years for leasehold
improvements. Depreciation and amortization expense was
$347,402, $312,321 and $300,384 in fiscal 2010, 2009 and 2008,
respectively.
Goodwill, core and developed technology, and in-process research
and development assets arise from acquisitions. Goodwill and
in-process research and development assets are reviewed annually
for impairment. Potential impairment of goodwill is identified
by comparing the fair value of a reporting unit, estimated using
an income approach, with its carrying value. Reporting units
generally represent one level below reporting segment. The
annual impairment review performed in fiscal year 2010 indicated
that all reporting units’ fair value exceeded their
respective carrying value. The review for impairment of
in-process research and development assets as well as core and
developed technology compares the fair value of the technology
or project assets, estimated using an income approach, with
their carrying value. Core and developed technology are
amortized over periods ranging from 15 to 20 years, using
the straight-line method.
Other intangibles with finite useful lives, which include
patents, are amortized over periods principally ranging from one
to 40 years, using the straight-line method. These
intangibles, including core and developed technology, are
periodically reviewed when impairment indicators are present to
assess recoverability from future operations using undiscounted
cash flows. To the extent carrying value exceeds the
undiscounted cash flows, an impairment loss is recognized in
operating results based upon the excess of the carrying value
over fair value. Other intangibles also include certain
trademarks that are considered to have indefinite lives, as they
are expected to generate cash flows indefinitely, and are
reviewed annually for impairment.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
Capitalized software, including costs for software developed or
obtained for internal use is stated at cost, less accumulated
amortization. Amortization expense is principally provided on
the straight-line basis over estimated useful lives, which do
not exceed 10 years. The current balance primarily includes
capital software investments related to a global enterprise
resource planning initiative to upgrade the Company’s
business information systems. Amortization for this project has
not commenced because the program has not yet been placed in
service. Amortization expense related to capitalized software
was $32,181, $46,485 and $56,368 for 2010, 2009 and 2008,
respectively.
Generally, foreign subsidiaries’ functional currency is the
local currency of operations and the net assets of foreign
operations are translated into U.S. dollars using current
exchange rates. The U.S. dollar results that arise from
such translation, as well as exchange gains and losses on
intercompany balances of a long-term investment nature, are
included in the foreign currency translation adjustments in
Accumulated other comprehensive (loss) income.
Revenue from product sales is recognized when title and risk of
loss pass to the customer. The Company recognizes revenue for
certain instruments sold from the Biosciences segment upon
installation at a customer’s site, as installation of these
instruments is considered a significant post-delivery
obligation. For certain sales arrangements, primarily in the
U.S., with multiple deliverables, revenue and cost of products
sold are recognized at the completion of each deliverable:
shipment, installation and training. These sales agreements are
divided into separate units of accounting. Revenue is recognized
upon the completion of each deliverable based on the relative
fair values of items delivered. Fair values are generally
determined based on sales of the individual deliverables to
other third parties.
The Company’s domestic businesses sell products primarily
to distributors who resell the products to end-user customers.
Rebates are provided to distributors that sell to end-user
customers at prices determined under a contract between the
Company and the end-user customer. Provisions for rebates, as
well as sales discounts and returns, are based upon estimates
and are accounted for as a reduction of revenues when revenue is
recognized.
Shipping and handling costs are included in Selling and
administrative expense. Shipping expense was $255,765, $250,941
and $263,504 in 2010, 2009 and 2008, respectively.
All derivatives are recorded in the balance sheet at fair value
and changes in fair value are recognized currently in earnings
unless specific hedge accounting criteria are met.
Derivative financial instruments are utilized by the Company in
the management of its foreign currency and interest rate
exposures. From time to time, the Company hedges forecasted
sales denominated in foreign currencies using forward and option
contracts to protect against the reduction in value of
forecasted foreign currency cash flows resulting from export
sales. The Company also periodically utilizes interest rate
swaps to maintain a balance between fixed and floating rate
instruments. The Company does not enter into derivative
financial instruments for trading or speculative purposes.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
Any deferred gains or losses associated with derivative
instruments are recognized in income in the period in which the
underlying hedged transaction is recognized. In the event a
designated hedged item is sold, extinguished or matures prior to
the termination of the related derivative instrument, such
instrument would be closed and the resultant gain or loss would
be recognized in income.
United States income taxes are not provided on undistributed
earnings of foreign subsidiaries where such undistributed
earnings are indefinitely reinvested outside the United States.
Deferred taxes are provided for earnings of foreign subsidiaries
when those earnings are not considered indefinitely reinvested.
Income taxes are provided and tax credits are recognized based
on tax laws enacted at the dates of the financial statements.
The Company conducts business and files tax returns in numerous
countries and currently has tax audits in progress in a number
of tax jurisdictions. In evaluating the exposure associated with
various tax filing positions, the Company records reserves for
uncertain tax positions, based on the technical support for the
positions, past audit experience with similar situations, and
the potential interest and penalties related to the matters.
The Company maintains valuation allowances where it is more
likely than not that all or a portion of a deferred tax asset
will not be realized. Changes in valuation allowances are
included in our tax provision in the period of change. In
determining whether a valuation allowance is warranted,
management evaluates factors such as prior earnings history,
expected future earnings, carry back and carry forward periods
and tax strategies that could potentially enhance the likelihood
of the realization of a deferred tax asset.
Basic earnings per share are computed based on the weighted
average number of common shares outstanding. Diluted earnings
per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions. These estimates or
assumptions affect reported assets, liabilities, revenues and
expenses as reflected in the consolidated financial statements.
Actual results could differ from these estimates.
The Company recognizes the fair value of share-based
compensation in net income. Compensation expense is recognized
on a straight-line basis over the requisite service period,
which is generally the vesting period.
Note 2 —
Accounting Changes
In December 2008, the Financial Accounting Standards Board
(“FASB”) issued revised guidance to require entities
to disclose the major categories of defined benefit and
postretirement plan assets and the measurement of these assets
in accordance with the fair value measurement framework as
defined under U.S. GAAP. The new guidance also requires
disclosures regarding how investment allocation decisions are
made. The Company adopted the revised disclosure requirements on
September 30, 2010 and there was no impact to the
consolidated financial statements as a result of this adoption.
The required disclosures are included in Note 8.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
The Company implemented the revised business combination rules
for acquisitions occurring after October 1, 2009. Under the
new rules, acquired in-process research and development assets
will be recorded as indefinite-lived intangible assets until
projects are completed or abandoned and acquisition-related
costs are expensed as incurred. Disclosures required under the
revised business combination rules relating to the
Company’s acquisition of HandyLab, Inc., on
November 19, 2009, are provided in Note 9.
The Company implemented new fair value measurement requirements
for nonfinancial assets and liabilities measured on a
nonrecurring basis on October 1, 2009. The new guidance
defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures relating to fair value
measurements. Assets and liabilities subject to this guidance
primarily include goodwill and indefinite-lived intangible
assets measured at fair value for impairment assessments,
long-lived assets measured at fair value when impaired and
non-financial assets and liabilities measured at fair value in
business combinations. The Company’s adoption of this
guidance did not materially impact the consolidated financial
statements.
On October 1, 2007, the Company adopted guidance relating
to the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Upon
implementing this guidance, the Company recognized a $5,084
increase in its existing liability for uncertain tax positions,
with a corresponding decrease to the October 1, 2007
retained earnings balance.
In October 2009, the FASB issued revised revenue recognition
guidance affecting the accounting for software-enabled devices
and multiple-element arrangements. The revisions expand the
scope of multiple-element arrangement guidance to include
revenue arrangements containing certain nonsoftware elements and
related software elements. Additionally, the revised guidance
changes the manner in which separate units of accounting are
identified within a multiple-element arrangement and modifies
the manner in which transaction consideration is allocated
across the separately identified deliverables. The revised
revenue recognition guidance is effective for new arrangements
the Company enters into on or after October 1, 2010. No
significant impact to the Company’s consolidated financial
statements is expected upon adoption of these new requirements.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
Note 3 —
Shareholders’ Equity
Changes in certain components of shareholders’ equity were
as follows:
Common stock held in trusts represents rabbi trusts in
connection with deferred compensation under the Company’s
employee salary and bonus deferral plan and directors’
deferral plan.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
The components of Accumulated other comprehensive (loss) income
were as follows:
The income tax provision (benefit) recorded in fiscal years
2010, 2009 and 2008 for the unrealized (loss) gain on
investments was $0, $25 and $(25), respectively. The income tax
provision (benefit) recorded in fiscal years 2010, 2009 and 2008
for cash flow hedges was $27,509, $(50,302) and $26,889,
respectively. The income tax benefit recorded in fiscal years
2010, 2009, 2008 for defined benefit pension, postretirement
plans and postemployment plans was $67,829, $146,554 and $3,439,
respectively. Income taxes are generally not provided for
translation adjustments.
The unrealized (losses) gains on cash flow hedges included in
other comprehensive (loss) income for 2010, 2009 and 2008 are
net of reclassification adjustments of $(19,512), $65,012, and
$(6,733), net of tax, respectively, for realized net hedge gains
(losses) recorded to revenues. These amounts had been included
in Accumulated other comprehensive (loss) income in prior
periods. The tax (benefit) provision associated with these
reclassification adjustments in 2010, 2009 and 2008 was
$(11,959), $39,846 and $(4,127), respectively.
The weighted average common shares used in the computations of
basic and diluted earnings per share (shares in thousands) for
the years ended September 30 were as follows:
Note 5 —
Commitments and Contingencies
Rental expense for all operating leases amounted to $65,000 in
2010, $64,500 in 2009, and $68,200 in 2008. Future minimum
rental commitments on noncancelable leases are as follows:
2011 — $45,200; 2012 — $36,500;
2013 — $26,500; 2014 — $24,400;
2015 — $21,100 and an aggregate of $43,400 thereafter.
As of September 30, 2010, the Company has certain future
purchase commitments aggregating to approximately $521,097,
which will be expended over the next several years.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
Given the uncertain nature of litigation generally, the Company
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 the Company is a party. In accordance with
U.S. generally accepted accounting principles, the Company
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 below, the Company 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 the
Company’s consolidated results of operations and
consolidated cash flows.
The Company is named as a defendant in the following purported
class action suits brought on behalf of distributors and other
entities that purchase the Company’s products (the
“Distributor Plaintiffs”), alleging that the Company
violated federal antitrust laws, resulting in the charging of
higher prices for the Company’s products to the plaintiffs
and other purported class members.
These actions have been consolidated under the caption
“In re Hypodermic Products Antitrust
Litigation.”
The Company is also named as a defendant in the following
purported class action suits brought on behalf of purchasers of
the Company’s products, such as hospitals (the
“Hospital Plaintiffs”), alleging that the Company
violated federal and state antitrust laws, resulting in the
charging of higher prices for the Company’s products to the
plaintiffs and other purported class members.
The plaintiffs in each of the above antitrust class action
lawsuits seek monetary damages. All of the antitrust class
action lawsuits have been consolidated for pre-trial purposes in
a Multi-District Litigation (MDL) in Federal court in New
Jersey.
On April 27, 2009, the Company entered into a settlement
agreement with the Distributor Plaintiffs in these actions. The
settlement agreement provided for, among other things, the
payment by the Company of
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
$45,000 in exchange for a release by all potential class members
of the direct purchaser claims under federal antitrust laws
related to the products and acts enumerated in the complaint,
and a dismissal of the case with prejudice, insofar as it
relates to direct purchaser claims. The release would not cover
potential class members that affirmatively opt out of the
settlement. On September 30, 2010, the court issued an
order denying a motion to approve the settlement agreement,
ruling that the Hospital Plaintiffs, and not the Distributor
Plaintiffs, are the direct purchasers entitled to pursue damages
under the federal antitrust laws for certain sales of BD
products. The settlement agreement currently remains in effect,
subject to certain termination provisions, and the Distributor
Plaintiffs are seeking appellate review of the court’s
order.
In June 2007, Retractable Technologies, Inc. (“RTI”)
filed a complaint against the Company under the caption
Retractable Technologies, Inc. vs. Becton Dickinson and
Company (Civil Action
No. 2:07-cv-250,
U.S. District Court, Eastern District of Texas). RTI
alleges that the BD
Integratm
syringes infringe patents licensed exclusively to RTI. In its
complaint, RTI also alleges that the Company engaged in false
advertising with respect to certain of the Company’s
safety-engineered products in violation of the Lanham Act; acted
to exclude RTI from various product markets and to maintain its
market share through, among other things, exclusionary contracts
in violation of state and federal antitrust laws; and engaged in
unfair competition. In January 2008, the court severed the
patent and non-patent claims into separate cases. RTI seeks
money damages and injunctive relief. On April 1, 2008, RTI
filed a complaint against BD under the caption Retractable
Technologies, Inc. and Thomas J. Shaw v. Becton Dickinson
and Company (Civil Action
No. 2:08-cv-141,
U.S. District Court, Eastern District of Texas). RTI
alleges that the BD
Integratm
syringes infringe another patent licensed exclusively to RTI.
RTI seeks money damages and injunctive relief. On
August 29, 2008, the court ordered the consolidation of the
patent cases. On November 9, 2009, at a trial of these
consolidated cases, the jury rendered a verdict in favor of RTI
on all but one of its infringement claims, but did not find any
willful infringement, and awarded RTI $5,000 in damages. On
May 19, 2010, the court granted RTI’s motion for a
permanent injunction against the continued sale by the Company
of its BD
Integratm
products in their current form, but stayed the injunction for
the longer of twelve months or the duration of any appeal. At
the same time, the court lifted a stay of RTI’s non-patent
claims that the court had imposed during the pendency of the
patent claims at the trial court level. On June 16, 2010,
the Company filed its appeal with the Court of Appeals for the
Federal Circuit.
On October 19, 2009, Gen-Probe Incorporated
(“Gen-Probe”) filed a patent infringement action
against BD in the U.S. District Court for the Southern
District of California. The complaint alleges that the BD
Vipertm
and BD
Vipertm
XTRtm
systems, and BD
ProbeTectm
specimen collection products infringe certain U.S. patents
of Gen-Probe. On March 23, 2010, Gen-Probe filed a
complaint, also in the U.S. District Court for the Southern
District of California, alleging that the BD
Maxtm
instrument infringes Gen-Probe patents. Additional disclosures
regarding this instrument are provided in Note 9. The
patents alleged to be infringed are a subset of the Gen-Probe
patents asserted against the Company in the October 2009 suit.
On June 8, 2010, the Court consolidated these cases.
Gen-Probe is seeking monetary damages and injunctive relief.
The Company believes that it has meritorious defenses to each of
the above-mentioned suits pending against the Company and is
engaged in a vigorous defense of each of these matters.
The Company is also involved both as a plaintiff and a defendant
in other legal proceedings and claims that arise in the ordinary
course of business.
The Company is a party to a number of Federal proceedings in the
United States brought under the Comprehensive Environment
Response, Compensation and Liability Act, also known as
“Superfund,” and similar state laws. The affected
sites are in varying stages of development. In some instances,
the remedy has been completed, while in others, environmental
studies are commencing. For all sites, there are other
potentially responsible parties that may be jointly or severally
liable to pay all cleanup costs.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
The Company’s organizational structure is based upon its
three principal business segments: BD Medical
(“Medical”), BD Diagnostics (“Diagnostics”)
and BD Biosciences (“Biosciences”).
The principal product lines in the Medical segment include
needles, syringes and intravenous catheters for medication
delivery; prefilled IV flush syringes; syringes and pen
needles for the self-injection of insulin and other drugs used
in the treatment of diabetes; prefillable drug delivery devices
provided to pharmaceutical companies and sold to end-users as
drug/device combinations; regional anesthesia needles and trays;
and sharps disposal containers.
The principal products and services in the Diagnostics segment
include integrated systems for specimen collection;
safety-engineered blood collection products and systems;
automated blood culturing systems; molecular testing systems for
sexually transmitted diseases and healthcare-associated
infections; microorganism identification and drug susceptibility
systems; liquid-based cytology systems for cervical cancer
screening; rapid diagnostic assays and plated media.
The principal product lines in the Biosciences segment include
fluorescence-activated cell sorters and analyzers; monoclonal
antibodies and kits for performing cell analysis; reagent
systems for life science research; cell imaging systems;
laboratory products for tissue culture and fluid handling;
diagnostic assays; cell culture media and supplements for
biopharmaceutical manufacturing; and diagnostic assays.
The Company evaluates performance of its business segments based
upon operating income. Segment operating income represents
revenues reduced by product costs and operating expenses. From
time to time, the Company hedges against certain forecasted
sales of
U.S.-produced
products sold outside the United States. Gains and losses
associated with these foreign currency translation hedges are
reported in segment revenues based upon their proportionate
share of these international sales of
U.S.-produced
products.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
Distribution of products is primarily through independent
distribution channels, and directly to end-users by BD and
independent sales representatives. No customer accounted for 10%
or more of revenues in any of the three years presented.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
The countries in which the Company has local revenue-generating
operations have been combined into the following geographic
areas: the United States (including Puerto Rico), Europe, Asia
Pacific and Other, which is comprised of Latin America, Canada,
and Japan.
Revenues to unaffiliated customers are based upon the source of
the product shipment. Long-lived assets, which include net
property, plant and equipment, are based upon physical location.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
The Company grants share-based awards under the 2004 Employee
and Director Equity-Based Compensation Plan (“2004
Plan”), which provides long-term incentive compensation to
employees and directors consisting of: stock appreciation rights
(“SARs”), stock options, performance-based restricted
stock units, time-vested restricted stock units and other stock
awards.
The amounts and location of compensation cost relating to
share-based payments included in consolidated statements of
income is as follows:
The associated income tax benefit recognized was $28,532,
$31,307 and $36,236, respectively.
Share-based
compensation attributable to discontinued operations was not
material.
SARs represent the right to receive, upon exercise, shares of
common stock having a value equal to the difference between the
market price of common stock on the date of exercise and the
exercise price on the date of grant. SARs vest over a four-year
period and have a ten-year term. The fair value was estimated on
the date of grant using a lattice-based binomial option
valuation model that uses the following weighted-average
assumptions:
Expected volatility is based upon historical volatility for the
Company’s common stock and other factors. The expected life
of SARs granted is derived from the output of the lattice-based
model, using assumed exercise rates based on historical exercise
and termination patterns, and represents the period of time that
SARs granted are expected to be outstanding. The risk-free
interest rate used is based upon the published
U.S. Treasury yield curve in effect at the time of grant
for instruments with a similar life. The dividend yield is based
upon the most recently declared quarterly dividend as of the
grant date. The total intrinsic value of SARs exercised during
2010, 2009, and 2008 was $2,831, $406, and $2,122, respectively.
The Company issued 26,730 shares during 2010 to satisfy the
SARs exercised. The actual tax benefit realized during 2010,
2009, and 2008 for tax deductions from SAR exercises totaled
$1,031, $154 and $808, respectively. The total fair value of
SARs vested during 2010, 2009 and 2008 was $33,640, $24,888 and
$16,429, respectively.
Table of Contents
Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
A summary of SARs outstanding as of September 30, 2010, and
changes during the year then ended is as follows:
The Company has not granted stock options since 2005. All
outstanding stock option grants are fully vested and have a
ten-year term.
A summary of stock options outstanding as of September 30,
2010 and changes during the year then ended is as follows:
Cash received from the exercising of stock options in 2010, 2009
and 2008 was $72,770, $53,019 and $122,977, respectively. The
actual tax benefit realized for tax deductions from stock option
exercises totaled $28,660, $16,931 and $62,230, respectively.
The total intrinsic value of stock options exercised during the
years 2010, 2009 and 2008 was $89,943, $53,630 and $191,627,
respectively. The total fair value of stock options vested
during 2010, 2009 and 2008 was $0, $6,083 and $18,951,
respectively.
Performance-based restricted stock units cliff vest three years
after the date of grant. These units are tied to the
Company’s performance against pre-established targets,
including its average growth rate of consolidated revenues and
average return on invested capital, over a three-year
performance period. Under the Company’s long-term incentive
program, the actual payout under these awards may vary from zero
to 200% of an employee’s target payout, based on the
Company’s actual performance over the three-year
performance period.
Table of Contents
Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
The fair value is based on the market price of the
Company’s stock on the date of grant. Compensation cost
initially recognized assumes that the target payout level will
be achieved and is adjusted for subsequent changes in the
expected outcome of performance-related conditions.
A summary of performance-based restricted stock units
outstanding as of September 30, 2010 and changes during the
year then ended is as follows:
The weighted average grant date fair value of performance-based
restricted stock units granted during the years 2009 and 2008
was $62.50 and $84.33, respectively. The total fair value of
performance-based restricted stock units vested during 2010,
2009 and 2008 was $24,357, $33,712 and $49,387, respectively. At
September 30, 2010, the weighted average remaining vesting
term of performance-based restricted stock units is
1.21 years.
Time-vested restricted stock units generally cliff vest three
years after the date of grant, except for certain key executives
of the Company, including the executive officers, for which such
units generally vest one year following the employee’s
retirement. The related share-based compensation expense is
recorded over the requisite service period, which is the vesting
period or in the case of certain key executives is based on
retirement eligibility. The fair value of all time-vested
restricted stock units is based on the market value of the
Company’s stock on the date of grant.
A summary of time-vested restricted stock units outstanding as
of September 30, 2010 and changes during the year then
ended is as follows:
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