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BECTON DICKINSON & CO 10-K 2011 Table of Contents
As filed
with the Securities and Exchange Commission on November 23,
2011
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, 2011
(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, 2011, the aggregate market value of the
registrant’s outstanding common stock held by
non-affiliates of the registrant was approximately
$17,370,014,569.
As of October 31, 2011, 214,890,631 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 January 31, 2012 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; sharps disposal
containers; and closed-system transfer devices. 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 instruments and
reagent systems 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 infectious diseases and
women’s health; 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 government
institutions; pharmaceutical and biotechnology companies;
hospitals; and blood banks.
During the second quarter of 2011, BD acquired 100% of the
outstanding shares of Accuri Cytometers, Inc, a company that
develops and manufactures personal flow cytometers for
researchers. The fair value of consideration transferred totaled
$205 million, net of cash acquired.
During the fourth quarter of 2011, BD acquired 100% of the
outstanding shares of Carmel Pharma Inc., a Swedish company that
manufactures the
PhaSeal®
System, a closed-system drug transfer device for the safe
handling of hazardous drugs that are packaged in vials. The fair
value of consideration transferred was $287 million, net of
cash acquired.
Additional information regarding these acquisitions 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.
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 2011. 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 raw materials
from sole suppliers. In cases where there are regulatory
requirements relating to qualification of suppliers, BD may not
be able to
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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 and
Suzhou, China, 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 $476 million, $431 million and
$405 million on research and development during the fiscal
years ended September 30, 2011, 2010 and 2009,
respectively. Fiscal 2011 spending included a $9 million charge
resulting from the discontinuance of a research program.
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.
Healthcare providers and related facilities are generally
reimbursed for their services through numerous payment systems
managed by various governmental agencies worldwide (e.g.,
Medicare and Medicaid in the
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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, the
Ministry for Health, Labor and Welfare in Japan, the Ministry of
Health and the National Development and Reform Commission in
China, among many others), 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
each 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 and
cost-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 (ACOs), DRG programs, and other such methods that
shift medical cost risk to providers) 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. Many of the changes set forth in this statute have only
recently been promulgated through formal regulations and most of
them have yet to be implemented. At this time, it remains
unclear whether, or how, the implementation of regulations
pursuant to the PPACA might affect payments 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, 2011, BD had 29,369 employees, of
whom 12,041 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 UN 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 Governance
and Nominating Committee, the Executive Committee and the
Science, Innovation and Technology Committee of the Board of
Directors, BD’s Corporate Governance Principles and its
Code of Conduct, are available at BD’s website at
www.bd.com/investors/corporate_governance/. Printed
copies of these materials, BD’s 2011 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.
In addition, the SEC maintains an internet site that contains
reports, proxy and information statements, and other information
regarding issues that file electronically with the SEC at
www.sec.gov.
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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 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 in 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.
Current
economic conditions could continue to adversely affect our
operations.
The global economic conditions may result in a decrease in the
demand for our products and services, increased pricing
pressure, longer sales cycles, and slower adoption of new
technologies. During fiscal year 2011, our revenue growth was
adversely affected by conditions in the healthcare industry,
including lower healthcare utilization, particularly in the
U.S. and western Europe, cost containment efforts by
governments and other payors for healthcare services and other
factors. These conditions resulted in weaker overall customer
demand and increased pricing pressure for some of our products.
We anticipate that these industry conditions will continue for
the foreseeable future. In addition, while the economic downturn
has 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
macroeconomic conditions may also adversely affect our
suppliers, and there can be no assurances that BD will not
experience any interruptions in supply in the future. We have
also experienced delays in collecting receivables in certain
countries in western Europe, and we may experience similar
delays in these and other jurisdictions experiencing liquidity
problems. The continued weakness in world economies makes the
strength and timing of any economic recovery uncertain, and
there can be no assurance that global economic conditions will
not deteriorate further.
Over half of our fiscal year 2011 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 we engage in may 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.
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 healthcare reform or otherwise, as discussed
below) or abroad could significantly
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reduce reimbursement for procedures using BD products, or result
in denial of reimbursement for those products. See
“Third-Party Reimbursement” under Item 1.
Business.
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 2011. 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 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 remains uncertain.
Efforts
to reduce the U.S. federal deficit could adversely affect our
results of operations.
As part of the law passed in August 2011 to extend the federal
debt limit and reduce government spending, a bipartisan
committee was established to identify up to $1.5 trillion in
cuts to federal programs. On November 21, 2011, the joint
committee announced that it would not reach an agreement by the
prescribed deadline, which will trigger an automatic $1.2
trillion in additional spending cuts in the absence of further
legislative action. Half of the automatic reductions would come
from lowering the caps imposed on domestic discretionary
spending and cutting domestic entitlement programs, including
reductions in payments to Medicare providers. Government
research funding could also be impacted as part of any deficit
reduction. Any such reductions in government healthcare spending
or research funding could result in reduced demand for our
products or additional pricing pressure.
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.
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As part of our strategy to increase revenue growth, we seek to
supplement our internal 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 any business we may acquire into our
existing business. There can be no assurance that any past or
future transaction will be successful.
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 pricing pressure, 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.
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 also placed
pricing pressure on medical device suppliers. Further
consolidation in the industry could exert additional pressure on
the prices of our products.
BD operations outside the United States subject BD to certain
risks, including the effects of fluctuations in foreign currency
exchange (discussed above); the effects of local economic
conditions; 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 or loss 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 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
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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.
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, among other things, alleged
antitrust violations and patent infringement, 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.
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 counterpart regulatory
agencies in other countries 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 have been increasing due to
increased requirements from the FDA for supporting data for
submissions. 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 those countries. 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
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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.
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 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.
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, or by our customers or
suppliers, 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.
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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, 2011, BD owned and leased 180
facilities throughout the world comprising approximately
17,081,296 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
2,416,594 square feet of leased space. The international
facilities comprise approximately 6,197,567 square feet of
owned and 1,448,201 square feet of leased space. Sales
offices and distribution centers included in the total square
footage are also located throughout the world.
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, the Czech Republic, 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.
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BD is named as a defendant in the following purported class
action suits brought on behalf of distributors and other
entities that purchase BD’s 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.
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 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, 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
federal court of appeals has granted the Distributor
Plaintiffs’ request to appeal the trial court’s order
on an interlocutory basis. BD currently cannot estimate the
range of reasonably possible losses with respect to these class
action matters beyond the $45 million already accrued and
changes to the amount already recognized may be required in the
future as additional information becomes available.
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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, and stayed the non-patent
claims during the pendency of the patent claims at the trial
court level. 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 duration of BD’s appeal. At the same time, the court
lifted a stay of RTI’s non-patent claims. On July 8,
2011, the Court of Appeals for the Federal Circuit reversed the
District Court judgment that BD’s 3ml
Integratm
products infringed the asserted RTI patents and affirmed the
District Court judgment of infringement against BD’s
discontinued 1ml
Integratm
products. On October 31, 2011, the Federal Circuit Court of
Appeals denied RTI’s request for an en banc rehearing. The
trial on RTI’s antitrust and false advertising claims is
scheduled to begin in February 2012. With respect to RTI’s
antitrust and false advertising claims, BD cannot estimate the
possible loss or range of possible loss as there are significant
legal and factual issues to be resolved. In the event that RTI
succeeds at trial and subsequent appeals, however, any potential
loss could be material as RTI will likely seek to recover
substantial damages including disgorgement of profits and
damages under the federal antitrust laws which are trebled. BD
believes RTI’s allegations are without merit.
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. 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 currently cannot estimate the
range of reasonably possible losses for this matter as the
proceedings are in relatively early stages and there are
significant issues to be resolved.
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
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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.
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.
PART II
BD’s common stock is listed on the New York Stock Exchange.
As of October 31, 2011, there were approximately
8,674 shareholders of record.
Market
and Market Prices of Common Stock (per common share)
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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, 2011.
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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 strategy focuses 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 2011 of $7.8 billion increased 6%
from the prior year and reflected volume increases of
approximately 4%, estimated favorable foreign exchange
translation of 3%, and estimated price decreases of just under
1%, reflecting an ongoing downward trend. Worldwide revenue
growth was also negatively impacted by about 2 percentage
points due to an unfavorable comparison to 2010, which included
strong sales related to the H1N1 flu pandemic, supplemental
government spending in Japan and economic stimulus research
spending in the U.S. We experienced strong international
sales of safety-engineered products and strong growth in
emerging markets, which was offset, in part, by weaker demand in
Western Europe resulting from austerity measures and lower
healthcare utilization. Sales in the United States of
safety-engineered devices grew 1% to $1.12 billion in 2011
from $1.11 billion in 2010. International sales of
safety-engineered devices grew 21% to $755 million in 2011
from $622 million in 2010, which included an estimated 8%
of favorable foreign currency translation. International
safety-engineered device revenue growth continues to be driven
by strong growth in the Medical Segment, with the largest growth
in emerging markets, including China and Latin America.
The healthcare industry is facing a challenging economic
environment. The current economic conditions and other
circumstances have resulted in pricing pressures for some of our
products, and we expect this downward pricing trend to continue
through fiscal year 2012. In addition, healthcare utilization in
the U.S. and Western Europe remains constrained due to
decreases in government and private healthcare spending,
resulting in less demand for our products, and we also expect
these conditions to continue into fiscal 2012. We are also
experiencing increased raw material costs. 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. In addition to the economic
conditions in the United States and elsewhere, numerous other
factors can affect our ability to achieve these goals including,
without limitation, increased competition and healthcare reform
initiatives. For example, the U.S. healthcare reform law
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 2011.
Our financial position remains strong, with cash flows from
operating activities totaling $1.7 billion in 2011. At
September 30, 2011, we had $1.6 billion in cash and
equivalents and short-term investments. In 2011, cash outflows
relating to acquisitions included the purchase of Carmel Pharma
AB (“Carmel Pharma”), a Swedish company that
manufactures the BD
PhaSeal®
System, a closed-system drug transfer device for the safe
handling of hazardous drugs that are packaged in vials, for
$287 million, net of cash acquired. Cash outflows in 2011
also reflected the acquisition of Accuri Cytometers, Inc.
(“Accuri”) a company that develops and manufactures
personal flow cytometers for researchers, for $205 million,
net of cash acquired. Capital expenditures were
$515 million in 2011 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 2011, we repurchased
18.4 million shares of common stock for $1.5 billion
and paid cash dividends to our shareholders totaling
$361 million. In November 2011, we issued $500 million
of 5-year
1.75% Notes and $1 billion of
10-year
3.125% Notes, as discussed further below.
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. We
did not enter into contracts to hedge cash flows in fiscal year
2011 or 2012. The favorable impact of
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foreign currency on revenues for 2011 reflected favorable
foreign currency translation and a favorable comparison
resulting from hedge losses recognized in 2010. For further
discussion refer to Note 12 to the consolidated financial
statements contained in Item 8. Financial Statements and
Supplementary Data.
Results
of Continuing Operations
Comparisons of income from continuing operations between 2011
and 2010 are affected by the following items that are reflected
in our financial results:
In addition, our 2011 results were unfavorably impacted by the
effects of the earthquake and tsunami in Japan that occurred
earlier in the year. For the total fiscal year 2011, these
events had an estimated unfavorable impact of about
$15 million on revenues, and approximately $0.05 diluted
earnings per share from continuing operations.
Medical revenues in 2011 of $4.0 billion increased
$211 million, or 5.6%, over 2010, which reflected an
estimated impact of favorable foreign currency translation of
3.3%.
The following is a summary of Medical revenues by organizational
unit:
Revenue growth in the Medical Segment reflected strong growth of
Pharmaceutical Systems and international safety-engineered
product sales. Revenues of safety-engineered products increased
33.4% internationally, which included an estimated favorable
foreign exchange impact of 9.7%. Revenue growth in the
Pharmaceutical Systems unit was driven by double-digit growth in
the United States, Japan and Latin America. U.S. revenue
growth in the Pharmaceutical Systems unit in 2011 was aided by
strong sales to companies producing certain generic heparin
products. Revenue growth in the Diabetes Care unit resulted
primarily from continued strong growth in worldwide pen needle
sales. Medical revenues in 2011 also reflected an unfavorable
comparison to the prior-year period that included strong sales
related to the H1N1 flu pandemic primarily in the first half of
the year. We estimate that this unfavorable comparison
negatively impacted Medical’s revenue growth rate by
approximately 2.2 percentage points.
Medical operating income in 2011 was $1.2 billion, or 29.5%
of Medical revenues, as compared with $1.1 billion, or
29.5%, of revenues in 2010. Gross profit margin was higher in
the current year than 2010 due to increased sales of products
with relatively high gross margins as well as continued
manufacturing productivity and lower manufacturing
start-up
costs. These favorable impacts on gross profit margin were
partially offset by increases in certain raw material costs and
higher pension costs allocated to the Segment. See further
discussion on gross profit margin below. Selling and
administrative expense as a percentage of
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Medical revenues in 2011 increased to 17.5% of revenues from
17.3% of revenues in 2010, primarily due to the acquisition of
Carmel Pharma and unfavorable foreign currency translation,
partially offset by continued spending controls. Research and
development expenses in 2011 increased $17 million, or 13%,
and reflected continued investment in the development of new
products and platforms, including new infusion therapy products
and new pen needle introductions.
Diagnostics revenues in 2011 of $2.5 billion increased
$161 million, or 7.0%, over 2010, which reflected an
estimated impact of favorable foreign currency translation of
3.1%.
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 3% in the United States, driven by BD
Vacutainertm
Push Button Blood Collection Set sales, and 15% internationally,
which included an estimated favorable foreign exchange impact of
7%. 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 and its healthcare-associated infections
(“HAI”) product offerings. Diagnostics revenues in
2011 also reflected an unfavorable comparison to the prior-year
period that included strong sales related to the flu pandemic in
2010. We estimate that this unfavorable comparison negatively
impacted Diagnostics’ revenue growth rate by approximately
0.6 percentage points.
Diagnostics operating income in 2011 was $636 million, or
25.7% of Diagnostics revenues, compared with $607 million,
or 26.2% of revenues, in 2010. Gross profit margin in the
Diagnostics segment was relatively flat as compared to the prior
year and reflected favorable foreign currency translation,
offset by higher raw material costs, primarily resin. See
further discussion on gross profit margin below. Selling and
administrative expense as a percentage of Diagnostics revenues
increased by 30 basis points in 2011 to 21.5%, primarily
due to investments in emerging markets and unfavorable foreign
currency translation, partially offset by continued spending
controls. Research and development expense increased
$13 million, or 9% over 2010 and reflected continued
investment in the development of new products and platforms,
including the BD
MAXtm
and new BD
Vipertm
platforms and menus.
Biosciences revenues in 2011 of $1.3 billion increased
$84 million, or 6.7%, over 2010, which reflected an
estimated impact of favorable foreign currency translation of
3.5%.
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The following is a summary of Biosciences revenues by
organizational unit:
Biosciences revenue growth was primarily driven by instrument
and reagent sales in the Cell Analysis unit. The segment’s
overall revenue growth was affected by slower growth in sales of
Discovery Labware products in the U.S. Revenue growth in
2011 was also negatively impacted by approximately
3.6 percentage points due to an unfavorable comparison to
2010, which included strong sales from U.S. stimulus
spending and supplemental spending in Japan.
Biosciences operating income in 2011 was $376 million, or
28.1% of Biosciences revenues, compared with $354 million,
or 28.2%, in 2010. The Segment’s operating income in 2011
reflected a higher gross profit margin than 2010 primarily due
to the favorable impact of foreign currency translation and
higher margins on service revenue. These favorable variances
from the prior year were partially offset by amortization of
intangibles associated with the acquisition of Accuri and
increases in certain raw material costs. See further discussion
on gross profit margin below. Selling and administrative expense
was 22.1% in 2011 as compared with 21.9% in 2010 and reflected
unfavorable foreign currency translation, partially offset by
continued spending controls. Research and development spending
increased $11 million or 12% and reflected spending on new
products and platforms, including the BD FACS
Versetm
Analyzer and other next generation cell sorters and analyzers.
Revenues in the United States in 2011 of $3.4 billion
increased 2%. U.S. revenue growth was negatively impacted
by approximately 2.4 percentage points due to an
unfavorable comparison to 2010, which included strong sales
related to the flu pandemic and stimulus spending. The Medical
segment experienced strong sales of Pharmaceutical Systems
products in the U.S. Diagnostics revenue growth was driven
by solid growth in infectious disease and molecular diagnostic
platforms. Revenue growth in the Biosciences segment was driven
by the Cell Analysis unit, partially offset by lower sales
growth of Discovery Labware products.
International revenues in 2011 of $4.5 billion increased
9.5%, which reflected an estimated impact of favorable foreign
currency translation of 5.9%. Overall, international growth was
driven by sales in emerging markets, with especially strong
performance in Asia Pacific and Latin America, which was
partially offset by slower growth in Western Europe.
International revenue growth was negatively impacted by about
1.5 percentage points due to an unfavorable comparison to
2010, which included strong sales related to the H1N1 flu
pandemic and supplemental spending in Japan. Revenue growth in
the Medical Segment was driven by strong sales of
safety-engineered products. Diagnostic revenue growth reflected
solid growth of Women’s Health and Cancer products within
the Diagnostic Systems unit, as governments are expanding
programs for cervical cancer screening in developing markets.
Biosciences revenue growth was driven by the Cell Analysis
unit’s instrument and reagent sales, primarily in emerging
markets.
Gross profit margin was 52.3% in 2011, compared with 51.9% in
2010. Gross profit margin in 2011 reflected estimated favorable
impacts of 20 basis points relating to foreign currency
translation and 30 basis points relating to operating
performance. The favorable impact from operating performance
resulted from increased sales of products with relatively higher
gross margins, increased productivity and lower manufacturing
start-up
costs, which were partially offset by increases in resin and
other raw material costs and higher
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pension costs. Gross profit margin in 2011 was also unfavorably
impacted by 10 basis points as a result of the amortization
of intangibles associated with the Accuri acquisition.
Selling and administrative expense in 2011 of $1.9 billion,
or 23.7% of revenues, increased $130 million, or 8%,
compared with $1.7 billion, or 23.3% of revenues, in 2010.
Aggregate expenses reflected $46 million of unfavorable
foreign exchange and increases in core spending of
$53 million, reflecting funding to expand our business in
emerging markets and higher shipping costs. Aggregate expenses
also reflected a $6 million charge to bad debt expense
related to European receivables, increased pension costs of
$13 million and higher acquisition-related expenses of
$6 million. Aggregate expenses for the year also included
increased spending of $14 million related to our global
enterprise resource planning initiative to update our business
information systems. These increases were partially offset by a
$7 million decrease in the deferred compensation plan
liability, as further discussed below.
Research and development (“R&D”) expense in 2011
was $476 million, or 6.1% of revenues, compared with
$431 million, or 5.8% of revenues, in 2010. The increase in
R&D expenditures includes spending for new products and
platforms in each of our segments, as previously discussed.
R&D expense also included a non-cash impairment charge of
$9 million in 2011 resulting from the discontinuance of a
research program within the Diagnostic Systems unit.
Interest expense in 2011 was $84 million, compared with
$51 million in 2010. This increase reflected higher levels
of long-term fixed rate debt, partially offset by lower average
interest rates on the overall long-term debt portfolio. Interest
income was $43 million in 2011, compared with
$35 million in 2010. This increase resulted from higher
interest rates and levels of investments outside the United
States, net of investment losses on assets related to our
deferred compensation plan. The related decrease in the deferred
compensation plan liability was recorded as a decrease in
selling and administrative expenses.
The effective tax rate in 2011 of 26.3% was lower compared with
the 2010 rate of 29.2% and reflected a favorable impact of
1.3 percentage points due to certain tax benefits. These
benefits resulted from the retroactive extension of the
U.S. research tax credit as well as a European
restructuring transaction. In addition, 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.
Income from continuing operations and diluted earnings per share
from continuing operations in 2011 were $1.3 billion and
$5.59, respectively. The charge related to the discontinuance of
a research program decreased income from continuing operations
in 2011 by $9 million, or $0.03 per share. 2011 earnings
also reflected an overall net favorable impact of foreign
currency fluctuations of $0.28 per share. Income from continuing
operations and diluted earnings per share from continuing
operations in 2010 were $1.2 billion and $4.90,
respectively. The charge related to healthcare reform decreased
income from continuing operations in 2010 by $9 million, or
$0.04 per share.
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.
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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,
2011, a 10% appreciation of the U.S. dollar over a one-year
period would decrease pre-tax earnings by $23 million,
while a 10% depreciation of the U.S. dollar would increase
pre-tax earnings by $23 million. Comparatively, considering
our derivative instruments outstanding at September 30,
2010, a 10% appreciation of the U.S. dollar over a one-year
period would have decreased pre-tax earnings by
$30 million, while a 10% depreciation of the
U.S. dollar would have increased pre-tax earnings by
$30 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, 2011 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, 2011 and 2010, 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 aggregate
fair value of our long-term debt and related fair value hedges
at September 30, 2011 and 2010 by approximately
$90 million and $56 million, respectively. A 10%
decrease in interest rates would increase the aggregate fair
value of these same financial instruments at September 30,
2011 and 2010 by approximately $96 million and
$59 million, respectively.
Net cash provided by continuing operating activities in 2011 was
$1.7 billion, unchanged from 2010. The change in operating
assets and liabilities resulted from a net use of cash and
primarily reflected higher levels of inventory and prepaid
expenses. Net cash provided by continuing operating activities
in 2010 was reduced
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by discretionary cash contributions to the U.S. pension
plan of $175 million. An additional discretionary cash
contribution of $100 million was made to the
U.S. pension plan in October 2011.
Capital
Expenditures
Our investments in capital expenditures are focused on projects
that enhance our cost structure and manufacturing capabilities
and support our strategy of geographic expansion with select
investments in growing markets. Capital expenditures were
$515 million in 2011, compared with $537 million in
2010. Capital spending for the Medical, Diagnostics and
Biosciences segments in 2011 was $367 million,
$93 million and $37 million, respectively, and related
primarily to manufacturing capacity expansions.
Acquisitions
of Businesses
Cash outflows relating to acquisitions of $492 million in
2011 were comprised of $287 million associated with the
acquisition of Carmel Pharma and $205 million associated
with the acquisition of Accuri. For further discussion, refer to
Note 9 to the consolidated financial statements contained
in Item 8, Financial Statements and Supplementary Data.
Debt
Issuances and Payments of Obligations
On November 8, 2010, we issued $700 million of
10-year
3.25% Notes and $300 million of
30-year
5.00% Notes. Short-term debt decreased to 9% of total debt
at the end of 2011, from 12% at the end of 2010. Floating rate
debt was 16% of total debt at the end of 2011 and 24% at the end
of 2010. Our weighted average cost of total debt at the end of
2011 was 4.9%, up from 4.6% at the end of 2010.
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, 2011 was 35.8% compared
with 23.7% at September 30, 2010.
On November 3, 2011, we issued $500 million of
5-year
1.75% Notes and $1 billion of
10-year
3.125% Notes. The net proceeds from these issuances are
expected to be used for repurchases of our common stock and
other general corporate purposes, which may include funding for
working capital, capital expenditures, and acquisitions.
Repurchase
of Common Stock
We repurchased approximately 18.4 million shares of our
common stock for $1.5 billion in 2011 and 10.1 million
shares for $750 million in 2010. In July 2011, our Board of
Directors authorized the repurchase of an additional
18 million of our common shares. When combined with the
remaining shares under the September 2010 Board of
Directors’ repurchase authorization, a total of
approximately 28 million common shares remain available for
purchase at September 30, 2011. We plan on share
repurchases of $1.5 billion in 2012, subject to market
conditions. Such repurchases are expected to be funded primarily
by the newly-issued debt in November 2011, as discussed further
above.
Cash
and Short-term Investments
At September 30, 2011, total worldwide cash and short-term
investments were $1.56 billion, of which $1.34 billion
was held in jurisdictions outside of the United States. We
regularly review the amount of cash and short-term investments
held outside the United States and currently intend to use most
of such amounts to fund our international operations and their
growth initiatives. However, if these amounts were moved out of
these jurisdictions or repatriated to the United States, there
could be tax consequences.
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Government
Receivables
Accounts receivable balances include sales to government-owned
or government-supported healthcare facilities. Because these
customers are government-owned or supported, we could be
impacted by declines in sovereign credit ratings or by defaults
in these countries.
We continually evaluate all government receivables, particularly
in Spain, Italy, and other parts of Western Europe, for
potential collection risks associated with the availability of
government funding and reimbursement practices. We believe the
current reserves related to government receivables are adequate
and this concentration of credit risk is not expected to have a
material adverse impact on our financial position or liquidity.
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, 2011. 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 19-to-1 to 29-to-1. There were no borrowings
outstanding under this facility at September 30, 2011. In
addition, we have informal lines of credit outside the United
States.
Access
to Capital and Credit Ratings
Our 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 our
products, deterioration in our key financial ratios or credit
ratings, or other significantly unfavorable changes in
conditions.
BD’s credit ratings at September 30, 2011 were as
follows:
Upon review of our plans for the November 2011 debt issuance,
Standard & Poor’s lowered BD’s Senior
Unsecured Debt rating to A+ and its Commercial Paper rating to
A-1, while
affirming a rating outlook for BD of “Stable”. At the
same time, Moody’s affirmed its Senior Unsecured Debt
rating of A2 and Commercial Paper rating of
P-1, but
lowered its rating outlook for BD to “Negative”.
While further deterioration in our credit ratings would increase
the costs associated with maintaining and borrowing under its
existing credit arrangements, such a downgrade would not affect
our ability to draw on these credit facilities, nor would it
result in an acceleration of the scheduled maturities of any
outstanding debt. We believe that given our debt ratings, our
conservative financial management policies, our ability to
generate cash flow and the non-cyclical, geographically
diversified nature of our businesses, we would have access to
additional short-term and long-term capital should the need
arise.
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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:
2010
Compared With 2009
Results
of Continuing Operations
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.
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.
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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
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.
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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.
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 stimulus
programs in the U.S. as well as supplemental 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
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.
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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.
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.
Net
Cash Flows from Continuing Operating
Activities
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
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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.
Net
Cash Flows from Continuing Investing
Activities
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.
Cash outflows relating to acquisitions of $281 million in
2010 primarily related to a cash outflow of $275 million
associated with the acquisition of HandyLab, Inc. For further
discussion refer to Note 9 to the consolidated financial
statements contained in Item 8, Financial Statements and
Supplementary Data.
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. 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.
Net
Cash Flows from Continuing Financing
Activities
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.
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 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 all of
the following criteria have been met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been
rendered; product price is fixed or determinable; and collection
of the resulting receivable is reasonably assured.
For certain instruments sold from the Biosciences segment, we
recognize revenue 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 and
revenue is recognized upon the completion of
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each deliverable based on its relative selling price. The
relative selling prices of installation and training are
determined based on the prices at which these deliverables would
be regularly sold on a standalone basis. The relative selling
prices of instruments are based on estimated selling prices.
These estimates represent the quoted sales contract price in
each arrangement.
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, which are based on
historical information for all rebates that have not yet been
processed, as well as sales discounts and returns, are accounted
for as a reduction of revenues when revenue is recognized.
Goodwill and in-process research and development assets are
subject to impairment reviews at least annually, or whenever
indicators of impairment arise. Intangible assets with finite
lives, including core and developed technology, and other
long-lived assets, are periodically reviewed for impairment when
impairment indicators are present.
We assess goodwill for impairment at the reporting unit level,
which is defined as an operating segment or one level below an
operating segment, referred to as a component. Our reporting
units generally represent one level below reporting segments and
we aggregate components within an operating segment that have
similar economic characteristics. For our 2011 annual impairment
assessment, we identified six reporting units. Potential
impairment of goodwill is identified by comparing the fair value
of a reporting unit with its carrying value. Our annual goodwill
impairment test for 2011 did not result in any impairment
charges, as the fair value of each reporting unit exceeded its
carrying value.
We generally use the income approach to derive the fair value
for impairment assessments. This approach calculates fair value
by estimating future cash flows attributable to the assets and
then discounting these cash flows to a present value using a
risk-adjusted discount rate. We selected this method because we
believe the income approach most appropriately measures our
income producing assets. 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 accruals 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.
Deferred taxes are not provided on undistributed earnings of
foreign subsidiaries that are indefinitely reinvested. At
September 30, 2011, the cumulative amount of such
undistributed earnings indefinitely reinvested outside the
United States was $3.8 billion. The determination of the
amount of the unrecognized
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deferred tax liability related to the undistributed earnings is
not practicable because of the complexities associated with its
hypothetical calculation.
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 will use a
discount rate of 4.9% for 2012, 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. We
will use a long-term expected rate of return on plan assets
assumption of 7.75% for the U.S. pension plan in 2012. 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, 2011.
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.
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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, 2011 and
2010, and the related consolidated statements of income,
comprehensive income, and cash flows for each of the three years
in the period ended September 30, 2011. 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, 2011 and 2010, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended September 30, 2011, 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, 2011, 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 23, 2011
expressed an unqualified opinion thereon.
/s/ Ernst &
Young LLP
New York, New York
November 23, 2011
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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, 2011,
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, 2011, 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, 2011 and 2010, and the related
consolidated statements of income, comprehensive income, and
cash flows for each of the three years in the period ended
September 30, 2011 of Becton, Dickinson and Company, and
our report dated November 23, 2011 expressed an unqualified
opinion thereon.
/s/ Ernst &
Young LLP
New York, New York
November 23, 2011
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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
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 12 years for machinery
and equipment and one to 20 years for leasehold
improvements. Depreciation and amortization expense was
$348,522, $347,402 and $312,321 in fiscal 2011, 2010 and 2009,
respectively.
Goodwill, core and developed technology, and in-process research
and development assets arise from acquisitions. Goodwill is
reviewed at least annually for impairment. Goodwill is assessed
for impairment at the reporting unit level, which is defined as
an operating segment or one level below an operating segment,
referred to as a component. The Company’s reporting units
generally represent one level below reporting segments, and
components within an operating segment that have similar
economic characteristics are aggregated. Potential impairment of
goodwill is identified by comparing the fair value of a
reporting unit, estimated using an income approach, with its
carrying value. The annual impairment review performed in fiscal
year 2011 indicated that all six identified reporting
units’ fair values exceeded their respective carrying
values.
The review for impairment of in-process research and development
assets, as well as core and developed technology assets,
compares the fair value of the technology or project assets,
estimated using an income approach, with their carrying value.
In-process research and development assets are considered
indefinite-lived assets until projects are completed or
abandoned, and these assets are reviewed at least annually for
impairment. Core and developed technology assets are amortized
over periods ranging from 15 to 20 years, using the
straight-line method, and are periodically reviewed for
impairment when impairment indicators are present.
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
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
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.
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 $23,173, $32,181 and $46,485 for 2011, 2010 and 2009,
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 typically recognized when all of
the following criteria have been met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been
rendered; product price is fixed or determinable; collection of
the resulting receivable is reasonably assured. 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 instrument sales
arrangements, primarily in the U.S., with multiple deliverables,
revenue and cost of products sold are recognized at the
completion of each deliverable: instrument shipment,
installation and training. Installation and training typically
occur within one month after an instrument is shipped. These
sales agreements are divided into separate units of accounting
and revenue is recognized upon the completion of each
deliverable based on its relative selling price. The relative
selling prices of installation and training are determined based
on the prices at which these deliverables would be regularly
sold on a standalone basis. The relative selling prices of
instruments are based on estimated selling prices. These
estimates represent the quoted sales contract price in each
arrangement.
The Company’s domestic businesses sell products primarily
to distributors that 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 $276,797, $255,765
and $250,941 in 2011, 2010 and 2009, respectively.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
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.
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 accruals 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 the 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.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
In October 2009, the Financial Accounting Standards Board
(“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 Company adopted the
revised revenue recognition guidance for new arrangements it
entered into on or after October 1, 2010. The adoption of
these new requirements did not significantly impact the
Company’s consolidated financial statements.
In June 2009, the FASB issued guidance amending the variable
interest consolidation model. The revised model amends certain
guidance for determining whether an entity is a variable
interest entity and requires a qualitative, rather than
quantitative, analysis to determine the primary beneficiary of a
variable interest entity. The Company’s adoption of the
amended variable interest consolidation model on October 1,
2010 did not significantly impact the Company’s
consolidated financial statements.
In September 2011, the FASB issued revised annual goodwill
impairment testing guidance. The revised requirements allow
entities to first qualitatively assess whether it is necessary
to perform the two-step quantitative goodwill impairment test.
Further testing of goodwill for impairment under the
quantitative model is required only if an entity determines,
through the qualitative assessment, that it is more likely than
not that a given reporting unit’s fair value is less than
its carrying amount. The revised goodwill impairment testing
requirements are effective for fiscal years beginning after
December 15, 2011 and early adoption is permitted. The
Company intends to apply the revised requirements in its fiscal
year 2012 goodwill impairment review processes. No significant
impact to the Company’s consolidated financial statements
is expected upon adoption of these revised requirements.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
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 change in foreign currency translation adjustments
represented a loss in fiscal year 2011 which is mainly
attributable to the weakening of the Euro, as well as certain
currencies in Latin America, against the U.S. dollar during
fiscal year 2011.
The income tax (benefit) provision recorded in fiscal years
2011, 2010 and 2009 for the unrealized (loss) gain on
investments was $(40), $0 and $25, respectively. The income tax
(benefit) provision recorded in fiscal years 2011, 2010 and 2009
for cash flow hedges was $(20,348), $27,509 and $(50,302),
respectively. The income tax benefit recorded in fiscal years
2011, 2010, 2009 for defined benefit pension, postretirement
plans and postemployment plans was $47,575, $67,829 and
$146,554, 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 2011, 2010 and 2009 are
net of reclassification adjustments of $0, $(19,512), and
$65,012, 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 2011, 2010 and 2009 was $0,
$(11,959) and $39,846, 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:
Rental expense for all operating leases amounted to $70,113 in
2011, $65,000 in 2010, and $64,500 in 2009. Future minimum
rental commitments on noncancelable leases are as follows: 2012
- $47,516; 2013 — $40,428; 2014 — $33,244;
2015 — $27,721; 2016 — $23,367 and an
aggregate of $44,557 thereafter.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
As of September 30, 2011, the Company has certain future
purchase commitments aggregating to approximately $505,586,
which will be expended over the next several years.
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.
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Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
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 $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 federal court of appeals has granted the Distributor
Plaintiffs’ request to appeal the trial court’s order
on an interlocutory basis. The Company currently cannot estimate
the range of reasonably possible losses with respect to these
class action matters beyond the $45,000 already accrued and
changes to the amount already recognized may be required in the
future as additional information becomes available.
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, and stayed the
non-patent claims during the pendency of the patent claims at
the trial court level. 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 duration of the Company’s appeal. At the same time, the
court lifted a stay of RTI’s non-patent claims. On
July 8, 2011, the Court of Appeals for the Federal Circuit
reversed the District Court judgment that the Company’s 3ml
BD
Integratm
products infringed the asserted RTI patents and affirmed the
District Court judgment of infringement against the
Company’s discontinued 1ml BD
Integratm
products. On October 31, 2011, the Federal Circuit Court of
Appeals denied RTI’s request for an en banc
rehearing. The trial on RTI’s antitrust and false
advertising claims is scheduled to begin in February 2012. With
respect to RTI’s antitrust and false advertising claims, BD
cannot estimate the possible loss or range of possible loss as
there are significant legal and factual issues to be resolved.
In the event that RTI succeeds at trial and subsequent appeals,
however, any potential loss could be material as RTI will likely
seek to recover substantial damages including disgorgement of
profits and damages under the federal antitrust laws which are
trebled. BD believes RTI’s allegations are without merit.
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
Table of Contents
Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
for the Southern District of California, alleging that the BD
Maxtm
instrument infringes Gen-Probe patents. 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 currently
cannot estimate the range of reasonably possible losses for this
matter as the proceedings are in relatively early stages and
there are significant issues to be resolved.
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.
The Company’s organizational structure is based upon its
three principal business segments: BD Medical
(“Medical”), BD Diagnostics (“Diagnostics”)
and BD Biosciences (“Biosciences”). These segments are
strategic businesses that are managed separately because each
one develops, manufactures and markets distinct products and
services.
The Medical segment produces a broad array of medical devices
that are used in a wide range of healthcare settings. The
principal product lines in the Medical segment 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 devices
provided to pharmaceutical companies and sold to end-users as
drug/device combinations; regional anesthesia needles and trays;
sharps disposal containers; and closed-system transfer devices.
The Diagnostics segment produces products for the safe
collection and transport of diagnostic specimens, as well as
instrument systems and reagents to detect a broad range of
infectious diseases, healthcare-associated infections
(“HAIs”) and cancers. 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 infectious diseases and
women’s health; microorganism identification and drug
susceptibility systems; liquid-based cytology systems for
cervical cancer screening; rapid diagnostic assays; and plated
media.
The Biosciences segment 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.
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; and cell culture media supplements for
biopharmaceutical manufacturing.
The Company evaluates performance of its business segments and
allocates resources to them primarily 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.
Table of Contents
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.
Table of Contents
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.
Table of Contents
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 $26,342,
$28,532 and $31,307, respectively.
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
2011, 2010, and 2009 was $9,185, $2,831, and $406, respectively.
The Company issued 81,848 shares during 2011 to satisfy the
SARs exercised. The actual tax benefit realized during 2011,
2010, and 2009 for tax deductions from SAR exercises totaled
$3,459, $1,031 and $154, respectively. The total fair value of
SARs vested during 2011, 2010 and 2009 was $31,992, $33,640 and
$24,888, respectively.
Table of Contents
Becton,
Dickinson and Company
Notes to
Consolidated Financial
Statements — (Continued)
A summary of SARs outstanding as of September 30, 2011, 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,
2011 and changes during the year then ended is as follows:
Cash received from the exercising of stock options in 2011, 2010
and 2009 was $103,267, $72,770 and $53,019, respectively. The
actual tax benefit realized for tax deductions from stock option
exercises totaled $45,829, $28,660 and $16,931, respectively.
The total intrinsic value of stock options exercised during the
years 2011, 2010 and 2009 was $137,720, $89,943 and $53,630,
respectively. The total fair value of stock options vested
during 2011, 2010 and 2009 was $0, $0 and $6,083, 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
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