BECTON DICKINSON & CO 10-Q 2012
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended December 31, 2011
For the transition period from to
Commission file number 001-4802
Becton, Dickinson and Company
(Exact name of registrant as specified in its charter)
1 Becton Drive, Franklin Lakes, New Jersey 07417-1880
(Address of principal executive offices)
(201) 847-6800 .
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by checkmark 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):
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
BECTON, DICKINSON AND COMPANY
For the quarterly period ended December 31, 2011
BECTON, DICKINSON AND COMPANY
Thousands of dollars
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANY
Thousands of dollars, except per share data
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANY
Thousands of dollars
See notes to condensed consolidated financial statements
BECTON, DICKINSON AND COMPANY
Dollar and share amounts in thousands, except per share data
December 31, 2011
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of the management of the Company, include all adjustments which are of a normal recurring nature, necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. However, the financial statements do not include all information and accompanying notes required for a presentation in accordance with U.S. generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included or incorporated by reference in the Companys 2011 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Note 2 Comprehensive Income
Comprehensive income was comprised of the following:
The loss recorded as foreign currency translation adjustments for the three months ended December 31, 2011 is mainly attributable to the weakening of the Euro against the U.S. dollar during this period. The gain recorded as benefit plan adjustments primarily relates to the November 30, 2011 remeasurement of the Companys U.S. defined pension plan. Additional disclosures regarding the benefit plan remeasurement are included in Note 7.
Note 3 Earnings per Share
The weighted average common shares used in the computations of basic and diluted earnings per share (shares in thousands) were as follows:
Note 4 Contingencies
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 Companys 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 Companys products (the Distributor Plaintiffs), alleging that the Company violated federal antitrust laws, resulting in the charging of higher prices for the Companys 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 Companys 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 Companys products to the plaintiffs and other purported class members.
The plaintiffs in each of the above antitrust class action lawsuits seek monetary damages. All of the antitrust class action lawsuits have been consolidated for pre-trial purposes in a Multi-District Litigation (MDL) in Federal court in New Jersey.
On April 27, 2009, the Company entered into a settlement agreement with the Distributor Plaintiffs in these actions. The settlement agreement provided for, among other things, the payment by the Company of $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 courts 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 Companys 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 RTIs 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 Companys appeal. At the same time, the court lifted a stay of RTIs non-patent claims. On July 8, 2011, the Court of Appeals for the Federal Circuit reversed the District Court judgment that the Companys 3ml BD Integra products infringed the asserted RTI patents and affirmed the District Court judgment of infringement against the Companys discontinued 1ml BD Integra products. On October 31, 2011, the Federal Circuit Court of Appeals denied RTIs request for an en banc rehearing. RTI has advised the court of its intention to seek an appeal of the Federal Circuit Court of Appeals patent ruling to the United States Supreme Court, and has until March 26, 2012, to file for such appeal. The trial on RTIs antitrust and false advertising claims has been postponed pending resolution of RTIs appeal of the patent ruling.
With respect to RTIs 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. These include discovery regarding RTIs alleged damages and liability theories, which has not been completed. Each party has filed motions seeking to exclude portions of the other partys expert testimony and to preclude the other party from introducing certain other evidence at trial. RTIs intention to seek an appeal of the appellate courts patent ruling to the U.S. Supreme Court adds further uncertainty to the possible future outcomes of RTIs antitrust and false advertising claims. In the event that RTI ultimately succeeds at trial and subsequent appeals on its antitrust and false advertising claims, any potential loss could be material as RTI is seeking to recover substantial damages including disgorgement of profits and damages under the federal antitrust laws which are trebled. BD believes RTIs 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 Viper and BD Viper XTR systems and BD ProbeTec 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 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, as, among other things, fact discovery is ongoing, expert discovery, including depositions, has not commenced, expert reports (including damage reports) have not been prepared, the claims that Gen-Probe intends to take to trial have not been specified, and summary judgment motions may still be filed.
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.
Note 5 Segment Data
The Companys 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 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. Financial information for the Companys segments was as follows:
Revenues by geographic areas were as follows:
Note 6 Share-Based Compensation
The Company grants share-based awards under the 2004 Employee and Director Equity-Based Compensation Plan (the 2004 Plan), which provides long-term incentive compensation to employees and directors. The Company believes that such awards align the interests of its employees and directors with those of its shareholders.
The fair value of share-based payments is recognized as compensation expense in net income. For the three months ended December 31, 2011 and 2010, compensation expense charged to income was $34,355 and $34,081, respectively. Share-based compensation attributable to discontinued operations was not material.
The amount of unrecognized compensation expense for all non-vested share-based awards as of December 31, 2011 was approximately $150,300, which is expected to be recognized over a weighted-average remaining life of approximately 2.6 years.
The fair values of stock appreciation rights granted during the annual share-based grants in November of 2011 and 2010, respectively, were estimated on the date of grant using a lattice-based binomial valuation model based on the following assumptions:
Note 7 Benefit Plans
The Company has defined benefit pension plans covering substantially all of its employees in the United States and certain foreign locations. The Company also provides certain postretirement healthcare and life insurance benefits to qualifying domestic retirees. Other postretirement benefit plans in foreign countries are not material. The measurement date used for the Companys employee benefit plans is September 30.
On November 30, 2011, the Company remeasured its U.S. defined pension plan as a result of amendments to this plan that were approved and communicated to affected employees during the first quarter of fiscal year 2012. Effective January 1, 2013, all plan participants benefits in the defined benefit traditional pension plan will be converted to a defined benefit cash balance pension plan. The November 30, 2011 remeasurement was based upon a discount rate of 5.1%, compared with the discount rate of 4.9% used on the September 30, 2011 measurement date. The increase in the discount rate will reduce total fiscal year 2012 net pension cost by $5,300. An increase in plan assets held as of November 30, 2011 compared with assets held as of September 30, 2011 also will reduce total fiscal year 2012 net pension cost by $6,200. The total reduction in fiscal year 2012 net pension cost resulting from the remeasurement will be $40,200.
Net pension and postretirement cost included the following components for the three months ended December 31:
Postemployment benefit costs for the three months ended December 31, 2011 and 2010 were $8,995 and $6,794, respectively.
Note 8 Divestitures
In the fourth quarter of fiscal year 2010, the Company sold the Ophthalmic Systems unit and the surgical blades, critical care and extended dwell catheter product platforms for $270,000. The Company recognized a pre-tax gain on sale from all of these divestitures of $146,478.
The results of operations associated with the Ophthalmic Systems unit, surgical blade platform and critical care platform are reported as discontinued operations for all periods presented in the accompanying Consolidated Statements of Income and Cash Flows and related disclosures. The Company agreed to perform contract manufacturing for a defined period after the sale of the extended dwell catheter product platform. Due to this significant continuing involvement in operations, the associated results of operations were reported within continuing operations and $18,197 of the gain on sale was recognized in Other income (expense).
Results of discontinued operations were as follows:
Note 9 Intangible Assets
Intangible assets consisted of:
Intangible amortization expense for the three months ended December 31, 2011 and 2010 was $16,532 and $11,734, respectively.
Note 10 Derivative Instruments and Hedging Activities
The Company uses derivative instruments to mitigate certain exposures. The effects these derivative instruments and hedged items have on financial position, financial performance, and cash flows are provided below.
Foreign Currency Risks and Related Strategies
The Company has foreign currency exposures throughout Europe, Asia Pacific, Canada, Japan and Latin America. From time to time, the Company may partially hedge forecasted export sales denominated in foreign currencies using forward and option contracts, generally with one-year terms. The Companys hedging program has been designed to mitigate exposures resulting from movements of the U.S. dollar, from the beginning of a reporting period, against other foreign currencies. The Companys strategy is to offset the changes in the present value of future foreign currency revenue resulting from these movements with either gains or losses in the fair value of foreign currency derivative contracts. The Company did not enter into contracts to hedge cash flows for fiscal year 2011 and as of December 31, 2011, the Company has not entered into contracts to hedge cash flows for fiscal year 2012.
The Company designates forward contracts used to hedge these certain forecasted sales denominated in foreign currencies as cash flow hedges. Changes in the effective portion of the fair value of the Companys forward contracts that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk) are included in Other comprehensive income (loss) until the hedged transactions are reclassified in earnings. These changes result from the maturity of derivative instruments as well as the commencement of new derivative instruments. The changes also reflect movements in the period-end foreign exchange rates against the forward rates at the time the Company enters into any given derivative instrument contract. Once the hedged revenue transaction occurs, the recognized gain or loss on the contract is reclassified from Accumulated other comprehensive income (loss) to Revenues. The Company records the premium or discount of the forward contracts, which is included in the assessment of hedge effectiveness, to Revenues.
In the event that the revenue transactions underlying a derivative instrument are no longer probable of occurring, accounting for the instrument under hedge accounting is discontinued. Gains and losses previously recognized in Other comprehensive income (loss) are reclassified into Other income (expense). If only a portion of the revenue transaction underlying a derivative instrument is no longer probable of occurring, only the portion of the derivative relating to those revenues would no longer be eligible for hedge accounting.
Transactional currency exposures that arise from entering into transactions, generally on an intercompany basis, in non-hyperinflationary countries that are denominated in currencies other than the functional currency are mitigated primarily through the use of forward contracts and currency options. Hedges of the transactional foreign exchange exposures resulting primarily from intercompany payables and receivables are undesignated hedges. As such, the gains or losses on these instruments are recognized immediately in income. The offset of these gains or losses against the gains and losses on the underlying hedged items, as well as the hedging costs associated with the derivative instruments, is recognized in Other income (expense).
The total notional amounts of the Companys outstanding foreign exchange contracts as of December 31, 2011 and September 30, 2011 were $1,619,341 and $2,209,780, respectively.
Interest Rate Risks and Related Strategies
The Companys primary interest rate exposure results from changes in U.S. dollar interest rates. The Companys policy is to manage interest cost using a mix of fixed and variable rate debt. The Company periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Company exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated as either fair value or cash flow hedges.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
Changes in the fair value of the interest rate swaps designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk) are offset by amounts recorded in Other comprehensive income (loss). If interest rate derivatives designated as cash flow hedges are terminated, the balance in Accumulated other comprehensive income (loss) attributable to those derivatives is reclassified into earnings over the remaining life of the hedged debt. The amount, related to terminated interest rate swaps, expected to be reclassified and recorded in Interest expense within the next 12 months is $5,271, net of tax.
The total notional amounts of the Companys outstanding interest rate swaps designated as fair value hedges were $200,000 at both December 31, 2011 and September 30, 2011. The outstanding swap represents a fixed-to-floating rate swap agreement that was entered into to convert the interest payments on $200,000 in 4.55% notes, due April 15, 2013, from the fixed rate to a floating interest rate based on LIBOR.
The Company had no outstanding interest rate swaps designated as cash flow hedges as of December 31, 2011. The total notional amount of the Companys outstanding interest rate swaps designated as cash flow hedges as of September 30, 2011 was $900,000 and included forward starting fixed-to-floating rate swap agreements under which the Company agreed to pay a fixed interest rate and receive a floating interest rate based on LIBOR, subject to mandatory termination and cash settlement on the forward start date. These hedges were entered into during the fourth quarter of fiscal year 2011 in anticipation of issuing new long-term debt in the first quarter of fiscal year 2012. Their purpose was to partially hedge the risk of changes in interest payments attributable to changes in the benchmark interest rate (the U.S. Dollar LIBOR swap rate) against which the debt was issued. These swaps were terminated on November 3, 2011, concurrent with the issuance of the new long-term debt.
Risk Exposures Not Hedged
The Company purchases resins, which are oil-based components used in the manufacture of certain products. While the Company has been able to hedge certain purchases of polyethylene, the Company does not currently use any hedges to manage the risk exposures related to other resins. Significant increases in world oil prices that lead to increases in resin purchase costs
could impact future operating results. From time to time, the Company has managed price risks associated with other commodity purchases. The Company had no commodity forward contracts outstanding as of December 31, 2011 or September 30, 2011.
Effects on Consolidated Balance Sheets
The location and amounts of derivative instrument fair values in the consolidated balance sheet are segregated below between designated, qualifying hedging instruments and ones that are not designated for hedge accounting.
Effects on Consolidated Statements of Income
Cash flow hedges
The location and amount of gains and losses on designated derivative instruments recognized in the consolidated statement of income for the three months ended December 31 consisted of:
The Companys designated derivative instruments are perfectly effective. As such, there were no gains or losses, related to hedge ineffectiveness or amounts excluded from hedge effectiveness testing, recognized immediately in income for the three-month period ending December 31, 2011.
The gain recorded in Other comprehensive income (loss) for the three months ended December 31, 2011 included the increase in the value of interest rate swaps entered into during the fourth quarter of fiscal year 2011 to partially hedge interest rate risk associated with the anticipated issuance of $500,000 of 5-year 1.75% notes and $1,000,000 of 10-year 3.125% notes in the first quarter of fiscal year 2012. These swaps were designated as hedges of the variability in interest payments attributable to changes in the benchmark interest rates against which the long-term debt was priced and they were terminated at a loss in November 2011, concurrent with the pricing of the notes. The gain recorded in Other comprehensive income (loss) for the three months ended December 31, 2011 also included the amortization of amounts related to terminated hedges.
The gain recognized in other comprehensive income for the three months ended December 31, 2010 was attributable primarily to gains realized on interest rate swaps that were entered into in the first quarter of 2011 in anticipation of issuing $700,000 of 10-year 3.25% notes and $300,000 of 30-year 5.00% notes. These swaps were designated as hedges of the variability in interest payments attributable to changes in the benchmark interest rates against which the long-term debt was priced and they were terminated at a gain in November 2010, concurrent with the pricing of the notes.
The realized gains and losses on the swaps terminated in both November 2011 and 2010 will be amortized over the lives of the notes with an offset to interest expense.
Fair value hedge
The location and amount of gains or losses on the hedged fixed rate debt attributable to changes in the market interest rates and the offsetting gain (loss) on the related interest rate swap were as follows:
The location and amount of gains and losses recognized in income on derivatives not designated for hedge accounting were as follows:
Note 11 Financial Instruments and Fair Value Measurements
The fair values of financial instruments, including those not recognized on the statement of financial position at fair value, carried at December 31, 2011 and September 30, 2011 are classified in accordance with the fair value hierarchy in the tables below:
The Companys institutional money market accounts permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions. The Companys remaining cash equivalents were $551,710 and $584,767 at December 31, 2011 and September 30, 2011, respectively. Short-term investments are held to their maturities and are carried at cost, which approximates fair value. The cash equivalents consist of liquid investments with a maturity of three months or less and the short-term investments consist of instruments with maturities greater than three months and less than one year. The Company measures the fair value of forward exchange contracts and currency options using an income approach with significant observable inputs, specifically spot currency rates, market designated forward currency prices and a discount rate. The fair value of interest rate
swaps is provided by the financial institutions that are counterparties to these arrangements. The fair value of long-term debt is based upon quoted prices in active markets for similar instruments.
The Companys policy is to recognize any transfers into fair value measurement hierarchy levels and transfers out of levels at the beginning of each reporting period. There were no transfers in and out of Level 1, Level 2 or Level 3 measurements for the three months ended December 31, 2011.
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.
Overview of Financial Results and Financial Condition
First quarter revenues of $1.888 billion represented an increase of 2.5% from the same period a year ago, and reflected volume increases of approximately 3.7%, partially offset by price decreases of approximately 1.3%. Foreign exchange translation had a minimal impact on revenue growth in the first quarter of 2012. During the quarter, we experienced weaker sales in the U.S. due to an uncertain research spending environment and increased pricing pressures compared to the prior years period. International revenues reflected continued strength in emerging market sales and strong sales of safety-engineered products. Sales in the United States of safety-engineered devices in the first quarter of 2012 were $291 million, representing a 2.4% increase from the prior years period. International sales of safety-engineered devices of $197 million in the first quarter of 2012 grew 16.4% over the prior years period, including an estimated $1 million, or less than 1%, unfavorable impact due to 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 pricing pressure 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 through fiscal 2012. We are also experiencing increased raw material costs.
We continue to invest in research and development spending, geographic expansion, and new product promotions to drive further revenue and profit growth. 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 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 BDs total U.S. revenues in fiscal year 2011.
Our financial condition remains strong, with cash flows from continuing operating activities totaling $313 million in the first three months of 2012. 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. Also, we continued to return value to our shareholders as we repurchased $400 million of our common stock and paid cash dividends of $96 million in the first quarter of 2012.
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. We evaluate our results of operations on both an as reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. We calculate foreign currency-neutral percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our current-period reported results.
From time to time, we may 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. As of December 31, 2011, we had not entered into contracts to hedge cash flows in fiscal year 2012 and revenues for the first quarter of fiscal year 2012 reflected a relatively immaterial favorable impact from foreign currency translation.
Results of Operations
Refer to Note 5 in the Notes to Condensed Consolidated Financial Statements for segment financial data.
First quarter revenues of $950 million represented an increase of $24 million, or 2.6%, compared with the prior years quarter, including an immaterial impact due to foreign currency translation.
The following is a summary of first quarter Medical revenues by organizational unit:
Medical segment revenue growth was primarily driven by Diabetes Care, with continued strong sales of pen needles. The segments revenue growth also reflected solid growth of safety-engineered product sales within Medical Surgical Systems. Pharmaceutical Systems revenue growth in the current years period reflected strong U.S. sales due to biotech sampling. This growth was partially offset by adjustments in customer inventory levels and the unfavorable comparison to the prior years period which included sales from the launch of a low molecular weight heparin product. These unfavorable impacts lowered Pharmaceutical Systems revenue growth by approximately 3 percentage points. Global sales of safety-engineered products were $240 million, as compared with $213 million in the prior years quarter, and included a relatively immaterial favorable impact due to foreign currency translation.
Medical operating income for the first quarter was $254 million, or 26.7% of Medical revenues, compared with $276 million, or 29.7% of segment revenues, in the prior years quarter. Gross profit margin was lower in the current quarter than the first quarter of 2011 due to amortization of intangibles associated with the Carmel Pharma, AB (Carmel) acquisition that occurred in the fourth quarter of fiscal year 2011, unfavorable pricing impacts on certain product lines and increases in certain raw material costs. These unfavorable impacts on gross profit margin were partially offset by lower manufacturing costs from Project ReLoCo, a global, cross-functional business initiative to drive sustained low-cost capability primarily benefitting Medical Surgical Systems. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Medical revenues in the first quarter of 2012 was higher than in the first quarter of 2011, primarily due to increased spending for expansion in emerging markets and higher expenses resulting from the Carmel acquisition as compared with the prior years period. Research and development expenses for the quarter increased $2 million, or 4% above the prior years period, reflecting ongoing investment in new products and platforms.
First quarter revenues of $621 million represented an increase of $19 million, or 3.2%, over the prior years quarter, including an estimated $1 million, or approximately 0.1%, unfavorable impact due to foreign currency translation.
The following is a summary of first quarter Diagnostics revenues by organizational unit:
Diagnostics segment revenue growth was primarily driven by sales of our Womens Health and Cancer platform, strong sales growth of our microbiology platform as well as sales of Preanalytical Systems safety-engineered products. Global sales of safety-engineered products in the Preanalytical Systems unit totaled $248 million, compared with $240 million in the prior years quarter, and included an estimated $1 million unfavorable impact due to foreign currency translation.
Diagnostics operating income for the first quarter was $165 million, or 26.6% of Diagnostics revenues, compared with $161 million, or 26.8% of segment revenues, in the prior years quarter. Gross profit margin was lower in the current quarter than in the prior years quarter due to unfavorable pricing impacts on certain product lines and increases in certain raw material costs. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Diagnostics revenues in the first quarter of 2012 was higher than in the first quarter of 2011 primarily due to increased spending for expansion in emerging markets and spending for new product launches. Research and development expenses in the first quarter of 2012 decreased by $4 million compared with the prior years period reflecting the timing of expenses. Diagnostics research and development spending for the total fiscal year 2012 is expected to be slightly below, as a percentage of revenues, the spending in total fiscal year 2011.
First quarter revenues of $317 million represented an increase of $3 million, or 0.9%, over the prior years quarter, including an estimated $2 million, or 0.6%, favorable impact due to foreign currency translation.
The following is a summary of first quarter Biosciences revenues by organizational unit:
Biosciences segment revenues in the current years quarter were relatively flat compared with the prior years period, reflecting reduced research funding in the U.S as well as reduced demand for high-end instruments.
Biosciences operating income for the first quarter was $83 million, or 26.2% of Biosciences revenues, compared with $90 million, or 28.8% of segment revenues, in the prior years quarter. Gross profit margin, as a percent of Biosciences revenue, was lower in the current quarter than the first quarter of 2011 primarily due to amortization of intangibles associated with capitalized software and the Accuri Cytometers, Inc. (Accuri) acquisition that occurred in the second fiscal quarter of 2011. These unfavorable variances from the prior years period were partially offset by lower manufacturing start-up costs. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Biosciences revenues for the quarter was higher compared with the prior years quarter and reflected increased spending for expansion in emerging markets and the effect of moderate revenue growth in the current years period as compared with the prior years period. Research and development spending in the quarter was relatively flat compared with the spending in the prior years period.
Revenues in the United States for the first quarter of $829 million were flat as compared with the prior years quarter. Growth in U.S. Medical revenues reflected strong sales of Pharmaceutical Systems and Diabetes Care products, which were partially offset as a result of pricing pressures for Medical Surgical products. U.S. Diagnostics revenue growth was affected by lower testing volumes impacting Preanalytical Systems. Biosciences revenue in the United States declined in the current years quarter compared with the prior years quarter due to reduced research funding for reagents as well as reduced demand for high-end instruments.
International revenues for the first quarter of $1.059 billion represented an increase of $45 million, or 4.5%, over the prior years quarter, including an estimated $1 million, or 0.1%, favorable impact due to foreign currency translation. International revenues for the first quarter of 2012 reflected growth from all segments, including growth attributable to emerging markets and strong sales of safety-engineered products.
Gross Profit Margin
Gross profit margin was 50.9% for the first quarter, compared with 53.0% for the comparable prior-year period. The decrease in gross profit margin reflected estimated unfavorable impacts of 200 basis points relating to operating performance and 10 basis points relating to foreign currency translation. Operating performance was adversely affected by 190 basis points due to unfavorable pricing impacts on certain product lines, decreased sales of products with higher gross margins and amortization of intangibles associated with the fiscal year 2011 Accuri and Carmel acquisitions. Operating performance was also unfavorably impacted by 70 basis points due to increases in certain raw material costs. The unfavorable impacts on operating performance for the current years period were partially offset by an estimated 60 basis points due to lower manufacturing costs from continuous improvement projects, such as Project ReLoCo, and lower manufacturing start-up costs.
Selling and Administrative Expense
Selling and administrative expense was 25.9% of revenues for the first quarter, compared with 24.3% for the prior years period. Aggregate expenses for the first quarter reflected an increase in core spending of $41 million, primarily relating to expansion of our business in emerging markets and higher expenses resulting from the Carmel acquisition. Aggregate expenses for the first quarter also reflected an increase in legal costs.
Research and Development Expense
Research and development expense was $114 million, or 6.0% of revenues, for the first quarter, representing a decrease of 1.4% compared with the prior years amount of $116 million, or 6.3% of revenues. This decrease in research and development expenses compared with the prior years period reflected the timing of expenses. Research and development spending for the total fiscal year 2012 is expected to be comparable, as a percentage of revenues, with the spending in total fiscal year 2011.
Non-Operating Expense and Income
Interest income of $15 million in the first quarter of 2012 was flat compared with the prior years period, reflecting no significant change in average interest rates and investment levels. Interest expense was $29 million in the first quarter, compared with $16 million in the prior years period. This increase reflects higher levels of long-term fixed-rate debt, partially offset by lower average interest rates on this debt.
The income tax rate was 23.6% for the first quarter, compared with the prior years rate of 23.0%. The income tax rate in the first quarter of 2012 reflected the favorable impact of various tax settlements in multiple jurisdictions. The income tax rate in the first quarter of 2011 reflected the favorable impact due to the timing of certain tax benefits resulting from the retroactive extension of the U.S. research tax credit and a European restructuring transaction.
Income from Continuing Operations and Diluted Earnings Per Share from Continuing Operations
Income from continuing operations and diluted earnings per share from continuing operations for the first quarter of 2012 were $263 million and $1.21, respectively. Income from continuing operations and diluted earnings per share from continuing operations for the prior years first quarter were $314 million and $1.35, respectively. The current quarters earnings reflected an estimated $0.01 unfavorable impact due to foreign currency translation.
Liquidity and Capital Resources
Cash generated from operations, along with available cash and cash equivalents, is expected to be sufficient to fund our normal operating needs in 2012. Normal operating needs in fiscal year 2012 include working capital, capital expenditures, cash dividends and common stock repurchases. Net cash provided by continuing operating activities was $313 million during the first three months of 2012, compared with $470 million in the same period in 2011. The current period change in operating assets and liabilities was a net use of cash and primarily reflected higher levels of inventory and lower levels of accounts receivable, accounts payable and accrued expenses. Net cash provided by continuing operating activities in the first quarter of 2012 was reduced by changes in the pension obligation resulting primarily from discretionary cash contributions of approximately $100 million.
Net cash used for continuing investing activities for the first three months of the current year was $252 million, compared with $567 million in the prior-year period. Capital expenditures were $104 million in the first three months of 2012 and $80 million in the same period in 2011. The increase in cash used for purchases of investments in the first quarter of 2011 reflected the extension of maturities of certain highly liquid investments beyond three months.
Net cash provided by continuing financing activities for the first three months of the current year was $959 million, compared with $136 million in the prior-year period. The current periods net cash provided by continuing financing activities includes the proceeds from $500 million of 5-year 1.75% notes and $1 billion of 10-year 3.125% notes issued on November 3, 2011. The net proceeds from these issuances are expected to be used for general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of our common stock and acquisitions. The prior periods cash provided by continuing financing activities included the proceeds from $700 million of 10-year 3.25% notes and $300 million of 30-year 5.00% notes issued on November 8, 2010. For the first three months of the current year, we repurchased approximately 5.5 million shares of our common stock for $400 million, compared with approximately 10.3 million shares of our common stock for $837 million in the prior-year period. Aggregate common stock repurchases are estimated to be approximately $1.5 billion for the full fiscal year 2012. A total of approximately 22.7 million common shares remain available for purchase at December 31, 2011 under the Board of Directors September 2010 and July 2011 repurchase authorizations, subject to market conditions.
As of December 31, 2011, total debt of $4.2 billion represented 46.2% of total capital (shareholders equity, net non-current deferred income tax liabilities, and debt), versus 35.8% at September 30, 2011. Short-term debt decreased to 5% of total debt at the end of December 31, 2011, from 9% at September 30, 2011.
We have in place a commercial paper borrowing program that is available to meet our short-term financing needs, including working capital requirements. Borrowings outstanding under this program were $200 million at December 31, 2011. We have available a $1 billion syndicated credit facility with an expiration date in December 2012. This credit facility, under which there were no borrowings outstanding at December 31, 2011, provides backup support for our commercial paper program and can also be used for other general corporate purposes. This credit facility includes a single financial covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio has ranged from 16-to-1 to 27-to-1. In addition, we have informal lines of credit outside the United States.
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 other government receivables, particularly in Italy, Spain 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.
Cautionary Statement Regarding Forward-Looking Statements
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 managements 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 IA. Risk Factors in our 2011 Annual Report on Form 10-K.
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.
There have been no material changes in information reported since the end of the fiscal year ended September 30, 2011.
An evaluation was carried out by BDs management, with the participation of BDs Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of BDs disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2011. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were, as of the end of the period covered by this report, effective and designed to ensure that material information relating to BD and its consolidated subsidiaries would be made known to them by others within these entities. There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2011 identified in connection with the above-referenced evaluation that have materially affected, or are reasonably likely to materially affect, BDs internal control over financial reporting.
We are involved, both as a plaintiff and a defendant, in various legal proceedings which arise in the ordinary course of business, including product liability and environmental matters as set forth in our 2011 Annual Report on Form 10-K and in Note 4 of the Notes to Condensed Consolidated Financial Statements in this report. Since September 30, 2011, the following developments have occurred with respect to the legal proceedings in which we are involved:
Retractable Technologies, Inc. (RTI)
RTI has advised the court of its intention to seek an appeal of the Federal Circuit Court of Appeals patent ruling to the United States Supreme Court, and has until March 26, 2012, to file for such appeal. The trial on RTIs antitrust and false advertising claims has been postponed pending resolution of RTIs appeal of the patent ruling.
Given the uncertain nature of litigation generally, BD is not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome of the litigation to which BD is a party. In accordance with U.S. generally accepted accounting principles, BD establishes accruals to the extent probable future losses are estimable (in the case of environmental matters, without considering possible third-party recoveries). In view of the uncertainties discussed above, BD could incur charges in excess of any currently established accruals and, to the extent available, excess liability insurance. In the opinion of management, any such future charges, individually or in the aggregate, could have a material adverse effect on BDs consolidated results of operations and consolidated cash flows.
There have been no material changes to the risk factors disclosed in Part 1, Item 1A, of our 2011 Annual Report on Form 10-K.
The table below sets forth certain information regarding our purchases of common stock of BD during the quarter ended December 31, 2011.
Issuer Purchases of Equity Securities
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.