EX-13 6 ex-13.htm EXHIBIT 13
   
  Becton, Dickinson and Company
Financials  


U.S. Revenues
(Millions of Dollars)

Non-U.S. Revenues
(Millions of Dollars)

Net Income
(Millions of Dollars)

Return on Invested Capital
(Percent)

Earning Per Share-Diluted
(Dollars)

Dividends Per Common Share
(Dollars)

3000

2500

2000

1500

1000

500

0

3000

2500

2000

1500

1000

500

0

750

600

450

300

150

0

30

25

20

15

10

5

0

3.0

2.5

2.0

1.5

1.0

0.5

0.0

0.75

0.60

0.45

0.30

0.15

0.0

01

02

03

04

05

01

02

03

04

05

01

02

03

04

05

01

02

03

04

05

01

02

03

04

05

01

02

03

04

05

17


   
  Becton, Dickinson and Company
Summary  
 
Ten-Year Summary of Selected Financial Data
Years Ended September 30
Dollars in millions, except per-share amounts
 
  2005   2004   2003   2002  
                         
Operations                        
Revenues $ 5,414.7   $ 4,934.7   $ 4,463.5   $ 3,960.4  
Research and Development Expense   271.6     235.6     224.2     207.2  
Operating Income   1,031.2     787.3     761.2     674.5  
Interest Expense, Net   19.3     29.6     36.5     33.2  
Income From Continuing Operations                        
   Before Income Taxes   1,004.9     752.9     722.0     627.5  
Income Tax Provision   312.6     170.4     167.0     148.1  
Net Income   722.3     467.4     547.1     480.0  
Basic Earnings Per Share   2.87     1.85     2.14     1.85  
Diluted Earnings Per Share   2.77     1.77     2.07     1.79  
Dividends Per Common Share   .72     .60     .40     .39  
                         
Financial Position                        
Current Assets $ 2,975.3   $ 2,641.3   $ 2,503.5   $ 2,091.4  
Current Liabilities   1,299.4     1,050.1     1,059.4     1,271.5  
Property, Plant and Equipment, Net   1,933.7     1,881.0     1,831.8     1,750.4  
Total Assets   6,072.0     5,752.6     5,572.3     5,029.0  
Long-Term Debt   1,060.8     1,171.5     1,184.0     803.0  
Shareholders’ Equity   3,284.0     3,067.9     2,897.0     2,480.9  
Book Value Per Common Share   13.26     12.30     11.54     9.71  
                         
Financial Relationships                        
Gross Profit Margin   50.8 %   49.3 %   48.5 %   48.3 %
Return on Revenues(E)   12.8 %   11.8 %   12.4 %   12.1 %
Return on Total Assets(B)(E)   17.9 %   14.1 %   14.4 %   13.6 %
Return on Equity(E)   21.8 %   19.5 %   20.6 %   20.0 %
Debt to Capitalization(D)(E)   27.3 %   28.1 %   30.5 %   32.7 %
                         
Additional Data                        
Number of Employees   25,600     25,000     24,800     25,200  
Number of Shareholders   9,442     9,654     9,868     10,050  
Average Common and Common                        
   Equivalent Shares Outstanding–                        
      Assuming Dilution (millions)   260.7     263.3     263.6     268.2  
Depreciation and Amortization $ 387.5   $ 357.2   $ 335.8   $ 296.6  
Capital Expenditures   317.6     265.7     259.2     255.7  
   
(A) Includes cumulative effect of accounting change of $36.8 ($.14 per basic and diluted share).
     
(B) Earnings before interest expense, taxes and cumulative effect of accounting changes as a percent of average total assets.
     
(C) Excludes the cumulative effect of accounting changes.
     
(D) Total debt as a percent of the sum of total debt, shareholders’ equity and net non-current deferred income tax liabilities.
     
(E) Excludes discontinued operations in 1999 to 2005.

18


   
  Becton, Dickinson and Company
   
   
  2001   2000   1999   1998   1997   1996  
                                     
Operations
                             
Revenues
$
3,667.6
$ 3,544.7   $ 3,412.6   $ 3,116.9   $ 2,810.5   $ 2,769.8  
Research and Development Expense
199.6
  212.8     220.7     217.9     180.6     154.2  
Operating Income
632.5
  507.4     477.3     405.4     450.5     431.2  
Interest Expense, Net
55.3
  74.2     72.0     56.3     39.4     37.4  
Income From Continuing Operations
                             
   Before Income Taxes
535.2
(A)
  512.7     404.8     340.9     422.6     393.7  
Income Tax Provision
134.2
  122.0     96.9     104.3     122.6     110.2  
Net Income
401.7
(A)
  392.9     275.7     236.6     300.1     283.4  
Basic Earnings Per Share
1.55
(A)
  1.54     1.09     .95     1.21     1.10  
Diluted Earnings Per Share
1.49
(A)
  1.49     1.04     .90     1.15     1.05  
Dividends Per Common Share
.38
  .37     .34     .29     .26     .23  
 
                             
Financial Position
                             
Current Assets
$
1,930.1
$ 1,847.6   $ 1,843.0   $ 1,542.8   $ 1,312.6   $ 1,276.8  
Current Liabilities
1,285.4
  1,382.4     1,358.6     1,091.9     678.2     766.1  
Property, Plant and Equipment, Net
1,701.3
  1,565.5     1,423.9     1,302.7     1,250.7     1,244.1  
Total Assets
4,790.8
  4,505.1     4,437.0     3,846.0     3,080.3     2,889.8  
Long-Term Debt
782.8
  778.5     954.0     765.2     665.4     468.2  
Shareholders’ Equity
2,321.7
  1,956.0     1,768.7     1,613.8     1,385.4     1,325.2  
Book Value Per Common Share
8.96
  7.72     7.05     6.51     5.68     5.36  
 
                             
Financial Relationships
                             
Gross Profit Margin
48.7
%
  48.6 %   49.9 %   50.6 %   49.7 %   48.4 %
Return on Revenues(E)
11.9
%(C)
  11.0 %   9.0 %   7.6 %   10.7 %   10.2 %
Return on Total Assets(B)(E)
13.6
%
  13.4 %   11.6 %   11.7 %   15.9 %   15.2 %
Return on Equity(E)
20.3
%(C)
  21.0 %   18.2 %   15.8 %   22.1 %   20.8 %
Debt to Capitalization(D)(E)
34.0
%
  41.7 %   47.6 %   41.4 %   36.3 %   34.3 %
 
                             
Additional Data
                             
Number of Employees
24,800
  25,000     24,000     21,700     18,900     17,900  
Number of Shareholders
10,329
  10,822     11,433     9,784     8,944     8,027  
Average Common and Common
                             
   Equivalent Shares Outstanding–
                             
      Assuming Dilution (millions)
268.8
  263.2     264.6     262.1     259.6     267.6  
Depreciation and Amortization
$
293.2
$ 273.7   $ 257.8   $ 228.7   $ 209.8   $ 200.5  
Capital Expenditures
364.1
  371.0     311.4     181.4     170.3     145.9  

19


   
  Becton, Dickinson and Company
Financial Review  

 

Company Overview
Becton, Dickinson and Company (“BD”) is a medical technology company engaged principally in the manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, life science researchers, clinical laboratories, 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, directly to end-users and by independent sales representatives. References to years throughout this discussion relate to our fiscal years, which end on September 30.

    BD management operates the business consistent with the following core strategies:

Ÿ To increase revenue growth by focusing on products that deliver greater benefits to patients, healthcare workers and researchers;
Ÿ To improve operating effectiveness and balance sheet productivity; and,
Ÿ To strengthen organizational and associate capabilities in the ever-changing healthcare environment.

    In assessing the outcomes of these strategies and 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, and cash flows.

    The results of our strategies are reflected in our fiscal 2005 financial and operational performance. Worldwide revenues in 2005 of $5.4 billion increased 10% from the prior year and reflected estimated volume increases of 6%, an estimated increase due to favorable foreign currency translation of 3%, and estimated price increases of less than 1%. U.S. revenues increased 6% to $2.6 billion. International revenues increased 13% to $2.8 billion. For a discussion of the financial impact of exchange rate fluctuations and the ways and extent to which we attempt to mitigate such impact, see “Financial Instrument Market Risk” below.

    Consistent with our strategy to provide products that deliver greater benefits to healthcare workers, and recognizing the issues surrounding sharps-related injuries, BD has developed a wide array of safety-engineered devices that are designed to reduce the incidence of needlestick injuries and exposure to bloodborne pathogens. These products are offered through our Medical and Diagnostics segments. Sales in the United States of safety-engineered devices grew 9% to $842 million in 2005, compared with $775 million in 2004. International sales of safety-engineered devices were approximately $273 million in 2005 compared with $203 million in 2004. In 2006, we expect U.S. sales of safety-engineered devices to increase about 8%. We are also anticipating growth of international safety sales of about 20%.

    Income from Continuing Operations was $692 million, or $2.66 per diluted share, in 2005 as compared with $583 million, or $2.21 per diluted share, in 2004. Comparisons of Income from Continuing Operations between 2005 and 2004 are affected by the following significant items that are reflected in our financial results:

2005
Ÿ We recorded share-based compensation expense of $70 million ($50 million after taxes), or $.19 per diluted share, in connection with the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123 (R)”). Prior periods were not restated.
Ÿ We recorded a one-time tax charge of $77 million, or $.30 per diluted share, attributable to the planned repatriation of foreign earnings under the American Jobs Creation Act of 2004.
   
2004
Ÿ We recorded a charge of $100 million ($63 million after taxes), or $.24 per diluted share, related to a litigation settlement.
Ÿ We recorded a charge of $45 million ($28 million after taxes), or $.11 per diluted share, related to the voluntary recall and writeoff of certain blood glucose strip inventory and other actions taken with respect to our blood glucose monitoring (“BGM”) products.


20


Financial Review    Becton, Dickinson and Company

 

    Our financial position remains strong with net cash provided by continuing operating activities of approximately $1.2 billion for 2005 and our debt-to-capitalization ratio from continuing operations (total debt as a percentage of the sum of shareholders’ equity, net non-current deferred income tax liabilities and total debt) having improved to 27.3% at September 30, 2005, from 28.1% at September 30, 2004.

    Our ability to sustain our long-term growth will depend on a number of factors, including our ability to expand our core business (including geographical expansion), develop innovative new products with higher gross profit margins across our business segments, and continue to improve operating efficiency and organizational effectiveness. Numerous factors can affect our ability to achieve these goals, including without limitation, U.S. and global economic conditions, increased competition and healthcare cost containment initiatives. We believe that there are several important factors relating to our business that tend to reduce the impact on BD of any potential economic or political events in countries in which we do business, including the effects of possible healthcare system reforms. These include the non-discretionary nature of the demand for many of our core products, which reduces the impact of economic downturns, our international diversification and our ability to meet the needs of the worldwide healthcare industry with cost-effective and innovative products.

    In 2005, general inflation did not have a material impact on our overall operations. However, it is possible that general inflation rates will rise in 2006 and beyond, and could have a greater impact on worldwide economies and consequently, on BD. In 2005, we experienced higher resin purchase costs, primarily due to recent increases in world oil prices and shortages of supply. BD currently expends approximately $150 to $170 million per year to purchase supplies of resins, which are oil-based components used in the manufacture of certain BD products. However, we continue to strive to improve our profit margins through increased sales of products with higher margins, cost reduction programs, productivity improvements and, to a lesser extent, periodic price increases and adjustments. For example, in 2006, we expect our gross profit margin to improve by 30 to 40 basis points over 2005.

    Our anticipated revenue growth over the next three years is expected to come from the following:

Ÿ Core business growth and expansion;
Ÿ Expanding the sale of our high-quality products around the globe; and,
Ÿ Development in each business segment of new products and services that provide increased benefits to patients, healthcare workers and researchers.

Accounting Change
Effective October 1, 2004, we adopted SFAS No. 123 (R). This statement requires compensation cost relating to share-based payment transactions to be recognized in net income using a fair-value measurement method. In November 2004, equity-based awards were granted to employees under a new long-term incentive program, which consisted of stock options and restricted stock awards. See Note 13 of the Notes Consolidated Financial Statements for a discussion of the valuation methodology used in estimating the fair value of these equity-based awards.

    In previous years, we had used stock options as our primary form of incentive compensation and such stock options were accounted for under the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” This method measured share-based compensation expense as the amount by which the market price of the stock on the date of grant exceeded the exercise price. Under APB No. 25, no share-based compensation expense was recognized for stock options since the exercise price equaled the market price of the underlying stock on the date of grant. We elected the modified prospective transition method for adopting SFAS No. 123(R) and therefore, prior periods were not restated. Under this method, the provisions of SFAS No. 123(R) were applied to new awards granted after the time of adoption, as well as to the unvested portion of previously granted equity-based awards for which the requisite service had not been rendered as of October 1, 2004. See Note 2 of the Notes to Consolidated Financial Statements for additional discussion.

    As a result of the adoption of SFAS No. 123(R) and the granting of restricted stock unit awards in November 2004, we recorded share-based compensation expense in 2005 as follows:

(millions of dollars) 2005    
Selling and administrative expense  $ 54    
Cost of products sold   10    
Research and development expense   6    
Total $ 70    

    Share-based compensation expense was recorded in corporate unallocated expense for segment reporting purposes. For 2006, we estimate share-based compensation expense will reduce diluted earnings per share from continuing operations by about $.23, as compared with $.19 in 2005.



21


Financial Review    Becton, Dickinson and Company

 

Results of Continuing Operations

Medical Segment
Medical revenues in 2005 of $3.0 billion increased $278 million, or 10%, over 2004, which includes an estimated impact of favorable foreign currency translation of 3%.

    The following is a summary of revenues by organizational unit:

(millions of dollars) 2005     2004   Total
Change
  Foreign
Exchange
Impact
 
Medical Surgical Systems  $ 1,661     $ 1,541     8 %   3 %
Diabetes Care   674       586     15 %   2 %
Pharmaceutical Systems   563       497     13 %   4 %
Ophthalmic Systems   60       56     7 %   3 %
Total Revenues $ 2,958     $ 2,680     10 %   3 %

    Medical revenues reflect the continued conversion in the United States to safety-engineered products, which accounted for sales of $490 million, as compared with $459 million in the prior year. Included in Medical revenues were international sales of safety-engineered products of $81 million, as compared with $63 million in the prior year. Revenue growth in the Medical Surgical Systems unit of this segment was primarily driven by the growth in safety-engineered products and prefilled flush syringes. The Diabetes Care unit’s revenue growth reflected strong sales of BGM products in the United States and pen needles worldwide. Sales of BGM meters, test strips and related disposables in the United States and Canada were $76 million, as compared with $42 million in 2004. BGM products were introduced into the European market through the launch in Germany during the fourth quarter of 2005. We expect revenues of BGM products to be about $115 million in 2006. Revenue growth in the Pharmaceutical Systems unit was primarily attributable to a 19% increase in international sales. For 2006, we expect the full year revenue growth for the Medical Segment to be about 5% to 6%, which includes an estimated unfavorable impact of foreign currency of about 2%.

    Medical operating income was $711 million, or 24.0% of Medical revenues, in 2005, as compared with $567 million, or 21.1% in 2004, which included $45 million of BGM charges as further discussed below. Operating income as a percentage of revenues reflects gross margin improvement from increased sales of products that have higher overall gross profit margins, in particular, safety-engineered products and pen needles. See further discussion on gross profit margin improvement below.

Selling and administrative expense as a percent of Medical revenues in 2005 was slightly lower compared with 2004, primarily due to the favorable effects from a weaker U.S. dollar along with tight controls on base spending. Incremental investments to support the BGM initiative were about $14 million. Research and development expenses in 2005 increased $14 million, or 17%, reflecting continued investment in the development of new products.

Diagnostics Segment
Diagnostics revenues in 2005 of $1.7 billion increased $125 million, or 8%, over 2004, which includes an estimated favorable impact of foreign currency translation of 2%.

    The following is a summary of revenues by organizational unit:

(millions of dollars) 2005     2004   Total
Change
  Foreign
Exchange
Impact
 
Preanalytical Systems  $ 855     $ 788     8 %   2 %
Diagnostic Systems   802       744     8 %   2 %
Total Revenues $ 1,657     $ 1,532     8 %   2 %

    Revenue growth in the Preanalytical Systems unit reflected the continued conversion in the United States to safety-engineered products and accounted for sales of $352 million, compared with $317 million in 2004. Sales of the BD Vacutainer Push Button Collection Sets were key to this trend. Preanalytical Systems revenues included international sales of safety-engineered products of $192 million, compared with $140 million in 2004. Geographic expansion in the Middle East and Asia Pacific regions, particularly in China, also contributed to the growth in the Preanalytical Systems unit. The Diagnostic Systems unit experienced solid worldwide sales of its automated diagnostic platforms, including the molecular BD ProbeTec ET, and the BD Phoenix Automated Microbiology System. These platforms reported combined incremental sales of $17 million over 2004. For 2006, we expect the full year revenue growth for the Diagnostics Segment to be about 5% to 6%, which includes an estimated unfavorable impact of foreign currency of about 2%.

    Diagnostics operating income was $414 million, or 25.0% of Diagnostics revenues, in 2005, compared with $359 million, or 23.5%, in 2004. The increase in operating income as a percentage of revenues reflects gross profit improvement from increased sales of products that have higher overall gross profit margins, in particular, safety-engineered products and the BD ProbeTec ET platform. See further discussion on gross profit margin improvement below. Selling and administrative expense as a percent of Diagnostics revenues in 2005 was slightly lower



22


Financial Review    Becton, Dickinson and Company

 

compared with 2004 primarily due to the favorable impact from a weaker U.S. dollar along with tight controls on spending. Research and development expenses in 2005 increased $6 million, or 8%, reflecting spending on new programs, and were partially offset by lower spending of $3 million, as a result of the completion of our cancer biomarker discovery program in 2004.

Biosciences Segment
Biosciences revenues in 2005 of $800 million increased $77 million, or 11%, over 2004, which includes an estimated impact of favorable foreign currency translation of 2%.

    The following is a summary of revenues by organizational unit:

(millions of dollars) 2005     2004   Total
Change
  Foreign
Exchange
Impact
 
Immunocytometry Systems  $ 452     $ 397     14 %   3 %
Pharmingen   141       136     4 %   2 %
Discovery Labware   207       190     9 %   3 %
Total Revenues $ 800     $ 723     11 %   3 %

    Revenue growth in the Immunocytometry Systems unit reflects strong sales of instruments and flow cytometry reagents, driven by increased demand for research and clinical analyzers. Revenue growth in the Immunocytometry Systems and Pharmingen units was adversely impacted by $1.8 million and $4.5 million, respec­­tively, as a result of terminating a distribution agreement in 2005. Revenue growth in the Discovery Labware unit resulted primarily from market share gains. For 2006, we expect the full year revenue growth for the Biosciences Segment to be about 8% to 9%, which includes an estimated unfavorable impact of foreign currency of about 2%.

    Biosciences operating income was $175 million, or 21.9% of Biosciences revenues in 2005, compared with $156 million, or 21.6% in 2004. The increase in operating income as a percentage of revenues reflects gross profit improvement from increased sales of products that have higher overall gross profit margins, in particular, research instruments and reagents. See further discussion of gross profit margin improvement below. Selling and administrative expense as a percent of Biosciences revenues in 2005 was comparable with 2004. The favorable effects from a weaker U.S. dollar and tight controls on spending were offset by one-time costs of $8 million incurred in connection with the termination of a distribution agreement. Research and development expenses in 2005 increased $5 million, or 10%, reflecting spending on new product development and advanced technology, particularly in the Immunocytometry Systems unit.

Geographic Revenues
On a geographic basis, revenues outside the United States in 2005 increased 13% to $2.8 billion. This increase includes an estimated impact of favorable foreign currency translation of 5%. International sales of safety-engineered devices were approximately $273 million in 2005, compared with $203 million in 2004. Our Asia Pacific/Japan, Canada, Europe, and Latin American regions contributed double-digit revenue growth in 2005.

    Revenues in the United States in 2005 of $2.6 billion increased 6%, primarily from strong sales of safety-engineered devices, prefilled flush syringes and diabetes care products, including BGM products. Revenues of immunocytometry instruments and reagents also demonstrated good growth.

Gross Profit Margin
Gross profit margin was 50.8% in 2005, compared with 49.3% in 2004. Gross profit margin in the current year included share-based compensation expense of $9.7 million, which reduced gross profit margin by 0.2%. Gross profit margin in 2004 included BGM charges of $45 million, as dis­cussed below, which reduced gross profit margin by 0.9%. Gross profit margin in the current year reflected an estimated 0.6% improvement resulting from a weaker U.S. dollar, an estimated 0.6% improvement relating to increased sales of products with higher margins, with the remaining 0.5% improve­­ment primarily related to productivity gains. These improvements more than offset an estimated 0.8% unfavor-able impact of higher raw material costs and intangible asset writedowns of 0.1%. We expect gross profit margin to improve by 30 to 40 basis points for fiscal 2006.

Operating Expenses
Selling and administrative expense (“SSG&A”) of $1.4 billion in 2005 was 26.8% of revenues, compared with $1.3 billion or 26.6% of revenues, in 2004. SSG&A in 2005 included $54 million of share-based compensation expense, which amounted to 1.0%. Aggregate expenses for 2005 reflect base spending increases of $49 million, in line with inflation. In 2006, SSG&A as a percentage of revenues is expected to decrease by 40 to 50 basis points.

Research and development (“R&D”) in 2005 was $272 million, or 5.0% of revenues, compared with $236 million, or 4.8% of revenues, in 2004. R&D in 2005 included $6 million of share-based compensation expense, which amounted to 0.1% of revenues. The increase in R&D expenditures also reflects spending for new programs in each of our segments, partially offset by reduced spending from molecular oncology diagnostics following the completion of our cancer biomarker discovery program in the third quarter of 2004. In 2006, we expect R&D to grow about 12%.



23


Financial Review    Becton, Dickinson and Company

 

Operating Income
Operating margin in 2005 was 19.0% of revenues, compared with 16.0% in 2004. Operating income of $1.0 billion in 2005 included $70 million of share-based compensation expense. Operating income of $787 million in 2004 included the $45 million of BGM charges and the $100 million litigation settlement, both discussed further below.

Non-Operating Expense and Income
Interest expense was $56 million in 2005 compared with $45 million in 2004 and reflects higher interest rates on floating rate debt and on fixed-to-floating interest rate swap transactions. Interest income was $36 million in 2005 compared with $15 million in 2004 and reflects increased interest income due to higher interest rates and cash balances.

Income Taxes
The effective tax rate in 2005 was 31.1% and reflected a 7.7% increase relating to the one-time charge in the fourth quarter of 2005 attributable to the planned repatriation of earnings in 2006 under the American Jobs Creation Act of 2004. In addition, the effective tax rate in 2005 reflected a 0.2% benefit relating to share-based compensation and a 1.0% benefit due to the reversal of tax accruals in connection with the conclusion of tax examinations in four non-U.S. jurisdictions. In 2004, the effective tax rate was 22.6% and reflected a 1.0% benefit relating to the BGM charges, and a 1.5% benefit relating to the litigation settlement. In 2006, we expect our effective tax rate to be about 26%.

Income and Diluted Earnings per
Share from Continuing Operations

Income from continuing operations and diluted earnings per share from continuing operations in 2005 were $692 million and $2.66, respectively. Share-based compensation expense and the tax repatriation charge decreased income from continuing operations in the aggregate by $127 million and diluted earnings per share from continuing operations by $.49 in 2005. Income from continuing operations and diluted earnings per share from continuing operations in 2004 were $583 million and $2.21, respectively. The BGM charges and the litigation settlement reduced income from continuing operations in the aggregate by $91 million and diluted earnings per share from continuing operations by $.35 in 2004.

Discontinued Operations
On August 31, 2005, we completed the sale of the Clontech unit of the Biosciences segment for $62 million. Clontech’s results of operations are reported as discontinued operations for all periods presented in the Consolidated Statements of Income. Income from discontinued operations in 2005 reflected a gain on sale of $13 million ($29 million after taxes). The loss from discontinued operations in 2004 reflected an after-tax charge of approximately $116 million to write down the net assets of Clontech to their estimated fair value. See Note 17 of the Notes to Consolidated Financial Statements for additional discussion.

Financial Instrument Market Risk
We selectively use financial instruments to manage the impact of foreign exchange rate and interest rate fluctuations on earnings. The counterparties to these contracts are highly rated financial institutions. We do not enter into financial instruments for trading or speculative purposes.

    We have foreign currency exposures throughout Europe, Asia Pacific, Canada, Japan and Latin America. We face transactional currency exposures that arise when we enter into transactions in non-hyperinflationary countries, generally on an intercompany basis, that are denominated in currencies other than our functional currency. We hedge substantially all such foreign exchange exposures primarily through the use of forward contracts and currency options. We also face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of a reporting period. We purchase option and forward contracts 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. For foreign currency derivative instruments, 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 on market prices, when available, or dealer quotes. The reduction in fair value of our purchased option contracts is limited to the option’s fair value. With respect to the derivative instruments outstanding at September 30, 2005, a 10% appreciation of the U.S. dollar over a one-year period would increase pre-tax earnings by $29 million, while a 10% depreciation of the U.S. dollar would increase pre-tax earnings by $15 million. Comparatively, considering our derivative instruments outstanding at September 30, 2004, a



24


Financial Review    Becton, Dickinson and Company

 

10% appreciation of the U.S. dollar over a one-year period would have increased pre-tax earnings by $39 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings by $6 million. These calculations do not reflect the impact of exchange gains or losses on the underlying positions that would substantially offset the results of the derivative instruments.

    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, 2005 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 acceptable 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, market risk is determined by calculating the impact to fair value of an assumed change in interest rates across all maturities. Fair values are estimated based on dealer quotes. A change in interest rates on short-term debt and interest-bearing investments is assumed to impact earnings and cash flow, but not fair value because of the short maturities of these instruments. A change in interest rates on long-term debt is assumed to impact fair value but not earnings or cash flow because the interest on such obligations is fixed. Based on our overall interest rate exposure at September 30, 2005 and 2004, a change of 10% in interest rates would not have a material effect on our earnings or cash flows over a one-year period. An increase of 10% in interest rates would decrease the fair value of our long-term debt and interest rate swaps at September 30, 2005 and 2004 by approximately $40 million and $42 million, respectively. A 10% decrease in interest rates would increase the fair value of our long-term debt and interest rate swaps at September 30, 2005 and 2004 by approximately $34 million and $46 million, respectively.

Liquidity and Capital Resources

Cash Flows from Continuing Operating Activities
Cash provided by continuing operating activities, which continues to be our primary source of funds to finance operating needs and capital expenditures, was $1.2 billion in 2005 compared with $1.1 billion in 2004.

Cash Flows from Continuing Investing Activities
Capital expenditures were $318 million in 2005, compared with $266 million in 2004. Medical capital spending of $185 million related primarily to various capacity expansions. Diagnostics capital spending, which totaled $100 million, included spending for various capacity expansions as well as for safety devices. Biosciences capital spending of $22 million included spending on manufacturing capacity expansions. In 2006, capital expenditures are expected to be in the $400 million range.

Cash Flows from Continuing Financing Activities
Net cash used for financing activities was $525 million in 2005, as compared with $507 million in 2004 and included the repurchase of shares of our common stock for approximately $550 million, compared to approximately $450 million in 2004. At September 30, 2005, 4.3 million common shares remained available for purchase under a November 2004 Board of Directors’ authorization to repurchase up to 10 million common shares. For 2006, we expect that cash used to repurchase common shares will be about $450 million. In 2005, the Company exercised the early redemption option available under the terms of our 8.7% Debentures, due January 15, 2025. Redemption, which is reflected in payments of long-term debt, was for the full $100 million in outstanding principal at a price of 103.949%. Total debt at September 30, 2005, was $1.3 billion compared with $1.2 billion at September 30, 2004. Short-term debt increased to 16% of total debt at year-end, from 4% at the end of 2004. Floating rate debt was 41% of total debt at the end of 2005 and 55% at the end of 2004. Our weighted average cost of total debt at the end of 2005 was 5.3%, up from 4.3% at the end of 2004 due to higher short-term interest rates. Debt-to-capitalization at year-end improved to 27.3% from 28.1% last year. Cash and equivalents were $1,043 million and $719 million at September 30, 2005 and 2004, respectively.

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, 2005. We maintain a syndicated credit facility totaling $900 million in order to provide backup support for our commercial paper program and for other general corporate purposes. This credit facility expires in August 2009 and includes a single financial



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 Financial Review    Becton, Dickinson and Company

 

covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio had ranged from 18-to-1 to 21-to-1. The facility, under which there were no borrowings outstanding at September 30, 2005, can be used to support the commercial paper program or for general corporate purposes. In addition, we have informal lines of credit outside the United States.

    At September 30, 2005, our long-term debt was rated “A2” by Moody’s and “A+” by Standard and Poor’s, and our commercial paper ratings were “P-1” by Moody’s and “A-1” by Standard and Poor’s. Given the availability of the various credit facilities and our strong credit ratings, we continue to have a high degree of confidence in our ability to refinance maturing short-term and long-term debt, as well as to incur substantial additional debt, if required.

    BD’s ability to generate cash flow from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected in the event there was a material decline in the demand for BD’s products, deterioration in BD’s key financial ratios or credit ratings or other significantly unfavorable changes in conditions. While a deterioration in the Company’s credit ratings would increase the costs associated with maintaining and borrowing under its existing credit arrangements, such a downgrade would not affect the Company’s ability to draw on these credit facilities, nor would it result in an acceleration of the scheduled maturities of any outstanding debt.

    The American Jobs Creation Act of 2004 (the “AJCA”) was signed into law in October 2004. The AJCA creates a temporary incentive for U.S. multinationals to repatriate accumulated income earned outside the United States. As a result of the passage of the AJCA, we revisited our policy of indefinite reinvestment of foreign earnings and determined that we will repatriate approximately $1.3 billion in fiscal 2006. As a result, we recorded a one-time tax charge of $77 million in the fourth quarter of 2005 attributable to the planned repatriation of these earnings. Uses of the repatriated funds include cash expenditures for compensation and benefits to existing and newly hired U.S. workers, U.S. infrastructure and capital investments and other activities as permitted under the AJCA.

Contractual Obligations
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:

(millions of dollars) Total   2006   2007
to 2008
  2009
to 2010
  2011 and
Thereafter
 
Short-term debt $ 207   $ 207   $   $   $  
Long-term debt(A)   1,819     60     208     307     1,244  
Operating leases   142     42     59     26     15  
Purchase obligations(B)   216     183     28     5      
Total(C) $ 2,384   $ 492   $ 295   $ 338   $ 1,259  
   
(A) Long-term debt obligations include expected principal and interest obligations, including interest rate swaps. The interest rate forward curve at September 30, 2005 was used to compute the amount of the contractual obligation for variable rate debt instruments and swaps.
     
(B) Purchase obligations are for purchases made in the normal course of business to meet operational and capital requirements.
     
(C) Required funding obligations for 2006 relating to pension plans are not expected to be material.

2004 Compared With 2003
Worldwide revenues in 2004 were $4.9 billion, an increase of 11% over 2003, and included the estimated favorable impact of foreign currency translation of 5%. The remainder of the growth resulted primarily from volume increases in all segments.

Medical Segment
Medical revenues in 2004 of $2.7 billion increased 9% over 2003, which includes an estimated impact of favorable foreign currency translation of 5%.

    The following is a summary of revenues by organizational unit:

(millions of dollars) 2004    2003    Total
Change
   Foreign
Exchange
Impact
  
Medical Surgical Systems $ 1,541   $ 1,426     8 %   4 %
Diabetes Care   586     542     8 %   4 %
Pharmaceutical Systems   497     436     14 %   9 %
Ophthalmic Systems   56     53     6 %   6 %
Total Revenues $ 2,680   $ 2,457     9 %   5 %


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 Financial Review    Becton, Dickinson and Company

 

    Revenue growth in the Medical Surgical Systems unit of this segment included U.S. safety-engineered product sales of $459 million compared with $412 million in 2003. Revenue growth in the Diabetes Care unit included sales of BGM meters, test strips, and related disposables in the United States and Canada of $42 million compared with $15 million in 2003. Growth in the Diabetes Care unit was negatively affected by the decline in the home healthcare product area. Revenue growth in the Pharmaceutical Systems unit reflects the adverse impact of customer buying patterns to support product launches in 2003. Revenue growth in the Medical Surgical Systems unit and Pharmaceutical Systems unit reflected lower sales of BD Bifurcated Needles used in the administration of smallpox vaccines, which were $2 million and $26 million in 2004 and 2003, respectively.

    Medical operating income was $567 million in 2004, which included $45 million of BGM charges, as discussed further below, compared with $556 million in 2003. Medical operating income in 2004 also reflected gross profit margin improvement resulting from the continued conversion to safety-engineered devices from conventional products and $15 million of benefits of the 2002 manufacturing restructuring program, partially offset by higher research and development spending to support several new product initiatives.

Diagnostics Segment
Diagnostics revenues in 2004 of $1.5 billion increased 12% over 2003, which includes an estimated impact of favorable foreign currency translation of 4%.

    The following is a summary of revenues by organizational unit:

(millions of dollars) 2004   2003   Total
Change
  Foreign
Exchange
Impact
 
Preanalytical Systems $ 788   $ 707     11 %   4 %
Diagnostic Systems   744     667     12 %   4 %
Total Revenues $ 1,532   $ 1,374     12 %   4 %

    Revenues in the Preanalytical Systems unit included U.S. safety-engineered device sales of $317 million compared with $272 million in 2003. Revenues in the Diagnostic Systems unit reflected strong worldwide sales of its respiratory and flu diagnostic tests in Japan and the United States over 2003. This unit also experienced strong worldwide sales of its molecular

diagnostic platform, BD ProbeTec ET, which reported incremen­tal sales of $18 million over 2003, and good worldwide perfor­mance in the more traditional infectious disease categories.

    Diagnostics operating income was $359 million in 2004 compared with $302 million in 2003. This increase primarily reflected gross profit margin improvement resulting from increased sales of products that have higher overall gross profit margins, including safety-engineered products and the BD ProbeTec ET platform.

Biosciences Segment
Biosciences revenues in 2004 of $723 million increased 14% over 2003, which includes an estimated impact of favorable foreign currency translation of 5%.

    The following is a summary of revenues by organizational unit:

(millions of dollars) 2004   2003   Total
Change
  Foreign
Exchange
Impact
 
Immunocytometry Systems $ 397   $ 332     20 %   6 %
Pharmingen   136     121     12 %   5 %
Discovery Labware   190     180     6 %   4 %
Total Revenues $ 723   $ 633     14 %   5 %

    Revenue growth in the Immunocytometry Systems unit was driven by sales of the newly introduced BD FACSCanto and BD FACSArray analyzers and continued strong market acceptance of the BD FACSAria cell sorter, as well as strong growth of cell analysis reagents.

    Biosciences operating income was $156 million in 2004 compared with $101 million in 2003, which included non-cash charges of $27 million, as discussed below. Biosciences 2004 operating income reflected sales growth resulting from new instrument introductions and increased sales of cell analysis reagents.

Geographic Revenues
On a geographic basis, revenues outside the United States in 2004 increased 15% over 2003 to $2.5 billion. This increase includes an estimated impact of favorable foreign currency translation of 9%. International sales of safety-engineered devices were approximately $200 million in 2004. International sales growth was led by strong sales of immunocytometry systems reagents and instruments as well as prefillable syringes in Europe. Also contributing to the growth were strong sales of respiratory and flu diagnostic tests in the Diagnostic Systems unit in Japan.



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 Financial Review    Becton, Dickinson and Company

 

    Revenues in the United States in 2004 of $2.4 billion increased 6% over 2003, primarily from strong sales of safety-engineered devices and prefillable syringes. Sales in the Diabetes Care unit included $40 million related to BGM meters, test strips and related disposables. The Diagnostic Systems unit reported incremental sales of $10 million over 2003 of the BD ProbeTec ET in the United States.

BGM Charges
We recorded a pre-tax charge of $45 million to Cost of prod-ucts sold in 2004 related to our BGM products. The charge included a reserve of $6 million in connection with the voluntary product recall of certain lots of BGM test strips and the write-off of $30 million of certain test strip inventories. In addition, the charge reflected our decision to focus sales and marketing efforts on the BD Logic and Paradigm Link® blood glucose meters in the United States and to discontinue support of the BD Latitude system product offering in the United States, which decision resulted in a write-off of $9 million of related blood glucose meters and fixed assets. See Note 19 of the Notes to Consolidated Financial Statements for further discussion.

Non-Cash Charges
We recorded non-cash charges of $27 million in 2003 in Cost of products sold. These charges resulted from the decision to discontinue the development of certain products and product applications associated with the BD IMAGN instrument platform in the Biosciences segment. As a result, we recorded an impairment charge of $27 million for the related intangible assets and inventory. See Note 3 of the Notes to Consolidated Financial Statements for further discussion.

Gross Profit Margin
Gross profit margin was 49.3% in 2004, which included $45 million of BGM charges, compared with 48.5% in 2003, which included $27 million of non-cash charges. Gross profit margin primarily reflected increased sales of products with higher gross profit margins, including safety-engineered products, BGM products and the BD ProbeTec ET instrument platform. In addition, gross profit margin benefited from approximately $15 million of savings achieved from the 2002 Medical restructuring plan.

Operating Expenses
SSG&A expense of $1.3 billion in 2004 was 26.6% of revenues, compared to $1.2 billion in 2003, or 26.5% of revenues. This increase was primarily the result of increased investment in various strategic initiatives, in particular, blood glucose monitoring products, as well as a weaker U.S. dollar.

    R&D in 2004 was $236 million, or 4.8% of revenues, compared with $224 million, or 5% of revenues, in 2003. Substantially all R&D efforts are in the United States and therefore are not impacted by foreign currency translation. However, the revenue increase attributable to foreign currency translation had the effect of decreasing R&D expenses as a percentage of sales.

    The litigation settlement of $100 million in 2004, as discussed in Note 16 of the Notes to Consolidated Financial Statements, related to the pre-tax charge to record the settlement of the litigation brought by Retractable Technologies, Inc.

Non-Operating Expense and Income
Interest expense was $45 million in 2004, compared with $43 million in 2003. Interest income was $15 million in 2004, compared with $7 million in 2003. This increase was due primarily to interest income arising from tax refunds received in connection with the conclusion of certain tax examinations during 2004, as well as higher levels of interest-bearing investments.

Income Taxes
The effective tax rate in 2004 was 22.6%, and reflected a 1% benefit relating to the BGM charges and a 1.5% benefit relating to the litigation settlement. The effective tax rate in 2003 was 23.1%, which included the impact from the 2003 non-cash charges.

Income and Diluted Earnings per Share
from Continuing Operations
Income from continuing operations and diluted earnings per share from continuing operations in 2004 were $583 million and $2.21, respectively, and included the impact of the BGM charges and litigation settlement in 2004, which reduced income from continuing operations in the aggregate by $91 million and diluted earnings per share from continuing operations in 2004 by $.35. Income from continuing operations and diluted earnings per share from continuing operations in 2003 were $555 million and $2.10, respectively. Non-cash charges in 2003 reduced income from continuing operations by $16 million and diluted earnings per share from continuing operations in 2003 by $.06.



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Financial Review    Becton, Dickinson and Company

 

Liquidity and Capital Resources

Cash Flows from Continuing Operating Activities
Cash provided by continuing operations was $1.1 billion in 2004, compared to $903 million in 2003.

Cash Flows from Continuing Investing Activities
Capital expenditures were $266 million in 2004, compared to $259 million in 2003. Medical and Diagnostics capital spending, which totaled $159 million and $80 million, respectively, in 2004, included spending for various capacity expansions as well as for safety devices. Biosciences capital spending, which totaled $17 million in 2004, included spending on manufacturing capacity expansions.

    In the fourth quarter of 2004, we spent approximately $24 million, net of cash acquired, to purchase Atto Bioscience, Inc. See Note 5 of the Notes to Consolidated Financial Statements for additional discussion.

Cash Flows from Continuing Financing Activities
Net cash used for financing activities was $507 million in 2004, as compared with $289 million during 2003, and included the repurchase of shares of our common stock for approximately $450 million, compared with approximately $350 million in 2003. Total debt at September 30, 2004, was $1.2 billion compared with $1.3 billion at September 30, 2003. Short-term debt declined to 4% of total debt at the end of 2004, from 9% at the end of 2003. Floating rate debt was 55% of total debt at the end of both 2004 and 2003. Our weighted average cost of total debt at the end of 2004 was 4.3%, up from 3.8% at the end of 2003 due to higher short-term interest rates. Debt-to-capitalization at September 30, 2004 improved to 28.1% from 30.5% in 2003. Cash and equivalents were $719 million and $520 million at September 30, 2004 and 2003, respectively.

Critical Accounting Policies
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, there may also be other estimates or assumptions that are reasonable. However, we believe that given the current facts and circumstances, it is unlikely that applying any such alternative judgments would materially impact 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 Recognition
Revenue from product sales is recognized when title and riskof loss pass to the customer. We recognize revenue for certain instruments sold from the Biosciences segment upon installation at a customer’s site. Based upon terms of the sales agreements, the Biosciences segment recognizes revenue in accordance with Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables.” These sales agreements have multiple deliverables, and as such are divided into separate units of accounting. Revenue is recognized upon the completion of each deliverable based on the relative fair values of items delivered.

    BD’s domestic businesses sell products primarily to distributors who resell the products to end-user customers. We provide rebates to distributors that sell to end-user customers at prices determined under a contract between BD and the end-user customer. Provisions for rebates, as well as sales discounts and returns, are accounted for as a reduction of revenues when revenue is recognized.

Impairment of Assets
Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets are subject to impairment reviews at least annually, or whenever indicators of impairment arise. Intangible assets other than goodwill and indefinite-lived intangible assets and other long-lived assets are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Impairment reviews are based on a cash flow approach that 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.



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Financial Review    Becton, Dickinson and Company

 

Investments
We hold equity interests in companies having operations or technology in areas within or adjacent to BD’s strategic focus. For some of these companies that are publicly traded, market prices are available. However, for those companies that are not publicly traded, fair value is difficult to determine. We write down an investment when management believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of the underlying investments could result in an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future.

Tax Valuation Allowances
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.

Contingencies
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 and environmental matters, as further discussed in Note 12 of the Notes to Consolidated Financial Statements. We assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. In accordance with U.S. generally accepted accounting principles, 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 in the period or periods in which they are recorded or paid.

Benefit Plans
We have significant net pension and postretirement benefit costs that are measured using actuarial valuations. Inherent in these valuations are key assumptions including discount rates and expected return on plan assets. We evaluate these key assumptions at least annually on a plan- and country-specific basis. We consider current market conditions, including changes in interest rates and market returns, in selecting these assumptions. Changes in the related net pension and postretirement benefits costs may occur in the future due to changes in assumptions.

    The discount rate is selected to reflect the prevailing market rate on September 30 based on investment grade bonds and other factors. We reduced our discount rate for the U.S. pension and postretirement plans at September 30, 2005 from 6.0% to 5.50% and at September 30, 2004 from 6.25% to 6.0%.

    To determine the expected long-term rate of return on pension plan assets, we consider the historical and expected returns on various plan asset classes, as well as current and expected asset allocations. At September 30, 2005, the one-year rate of return on assets for our U.S. pension plans was 12.8%, the five-year rate of return was 3.2%, and the ten-year rate of return was 8.3%. We believe that these results, in connection with our current and expected asset allocation, support our assumed long-term return of 8.0% on those assets.

    Sensitivity to changes in key assumptions for our U.S. pension and postretirement plans are as follows:

Ÿ Discount rate–A change of plus (minus) 25 basis points, with other assumptions held constant, would have an estimated $7 million favorable (unfavorable) impact on the total U.S. net pension and postretirement benefit plan cost.
Ÿ Expected return on plan assets–A change of plus (minus) 25 basis points, with other assumptions held constant, would have an estimated $2 million favorable (unfavorable) impact on U.S. pension plan cost.

Stock-Based Compensation
Effective October 1, 2004, we adopted SFAS No. 123(R). This statement requires compensation cost relating to share-based payment transactions to be recognized in net income using a fair-value measurement method.



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    Prior to October 1, 2004, we accounted for stock options using the intrinsic value method. This method measures share-based compensation expense as the amount by which the market price of the stock on the date of grant exceeds the exercise price. We had not recognized any share-based compensation expense under this method in recent years because we granted stock options at the market price as of the date of grant.

    See discussion in Note 13 of the Notes to Consolidated Financial Statements concerning the Company’s methodology for determining fair value for its share-based awards.

Cautionary Statement Pursuant to Private Securities Litigation Reform Act of 1995–“Safe Harbor” for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of BD. BD and its representatives may from time to time make certain forward-looking statements in publicly released materials, both written and oral, including statements contained in this report and filings with the Securities and Exchange Commission and in our other reports to shareholders. Forward-looking statements may be identified by the use of words like “plan,” “expect,” “believe,” “intend,” “will,” “anticipate,” “estimate” and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance, as well as our strategy for growth, product development, regulatory approvals, market position and expenditures. All statements that address operating performance or events or developments that we expect or anticipate will occur in the future–including statements relating to volume growth, sales and earnings per share growth and statements expressing views about future operating results–are forward-looking statements within the meaning of the Act.

    Forward-looking statements are based on current expectations of future events. The forward-looking statements are and will be based on management’s then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results could vary materially from our expectations and projections. Investors are therefore cautioned not to place undue reliance on any forward-looking statements. Furthermore, we undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events and developments or otherwise.

    The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements:

Ÿ Regional, national and foreign economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates and the potential effect of such fluctuations on revenues, expenses and resulting margins.
Ÿ We operate in a highly competitive environment. New product introductions by our current or future competitors could adversely affect our ability to compete in the global market. Patents attained by competitors, particularly as patents on our products expire, may also adversely impact our competitive position. While we believe our opportunities for sustained, profitable growth are considerable, actions of competitors could impact our revenue growth and earnings.
Ÿ Recently, it has been reported that the U.S. Food and Drug Administration (“FDA”) advisory panel has recommended approval by the FDA of a new inhaled form of insulin, which, if approved, could adversely impact sales of our insulin injection devices. However, we believe that any impact would be mitigated by certain factors, including the convenience and efficacy of insulin injections, the high degree of satisfaction with insulin needles by patients who inject insulin, and our expectation that many insulin injectors would need to continue to inject at least once per day to control their blood sugar levels, even when inhaled insulin is used.
Ÿ Changes in domestic and foreign healthcare industry practices and regulations resulting in increased pricing pressures, including the continued consolidation among healthcare providers; trends toward managed care and healthcare cost containment; and government laws and regulations relating to sales and promotion, reimbursement and pricing generally.
Ÿ The effects, if any, of governmental and media activities relating to U.S. Congressional hearings regarding the business practices of group purchasing organizations, which negotiate product prices on behalf of their member hospitals with BD and other suppliers.
Ÿ Fluctuations in the cost and availability of raw materials and the ability to maintain favorable supplier arrangements and relationships (particularly with respect to sole-source suppliers) and the potential adverse effects of any disruption in the availability of such raw materials.
Ÿ Our ability to obtain the anticipated benefits of any restructuring programs that we may undertake.


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Ÿ Adoption of or changes in government laws and regulations affecting domestic and foreign operations, including those relating to trade, monetary and fiscal policies, taxation, environmental matters, sales practices, price controls, licensing and regulatory approval of new products, or changes in enforcement practices with respect to any such laws and regulations.
Ÿ Fluctuations in U.S. and international governmental funding and policies for life science research.
Ÿ Difficulties inherent in product development, including the potential inability to successfully continue technological innovation, complete clinical trials, obtain regulatory approvals in the United States and abroad, or gain and maintain market approval of products, as well as the possibility of encountering infringement claims by competitors with respect to patent or other intellectual property rights, all of which can preclude or delay commercialization of a product.
 • Pending and potential litigation or other proceedings adverse to BD, including antitrust claims, product liability claims, and patent infringement claims, as well as other risks and uncertainties detailed from time to time in our Securities and Exchange Commission (“SEC”) filings.
Ÿ The effects, if any, of adverse media exposure or other publicity regarding BD’s business or operations.
Ÿ Our ability to achieve earnings forecasts, which are generated based on projected volumes and sales of many product types, some of which are more profitable than others. There can be no assurance that we will achieve the projected level or mix of product sales.
Ÿ The effect of market fluctuations on the value of assets in BD’s pension plans and the possibility that BD may need to make additional contributions to the plans as a result of any decline in the value of such assets.
Ÿ Our ability to effect infrastructure enhancements and incorporate new systems technologies into our operations.
Ÿ Product efficacy or safety concerns resulting in product recalls, regulatory action on the part of the FDA (or foreign counterparts) or declining sales.
Ÿ Economic and political conditions in international markets, including civil unrest, governmental changes and restrictions on the ability to transfer capital across borders.
Ÿ The effects of natural disasters, including hurricanes or pandemic diseases, on our ability to manufacture our products, particularly where production of a product line is concentrated in one or more plants, or on our ability to source components from suppliers that are needed for such manufacturing.
Ÿ Our ability to penetrate developing and emerging markets, which also depends on economic and political conditions, and how well we are able to acquire or form strategic business alliances with local companies and make necessary infrastructure enhancements to production facilities, distribution networks, sales equipment and technology.
Ÿ The impact of business combinations, including acquisitions and divestitures, both internally for BD and externally in the healthcare industry.
Ÿ Issuance of new or revised accounting standards by the Financial Accounting Standards Board or the SEC.

    The foregoing list sets forth many, but not all, of the factors that could impact our ability to achieve results described in any forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties.



32


   
  Becton, Dickinson and Company
Reports of Management  

 

Management’s Responsibilities
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 five 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, 2005.

    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 presentation of the statements, management’s assessment, and the effectiveness of internal control over financial reporting are included herein.

     
         
Edward J. Ludwig
Chairman, President and
Chief Executive Officer
  John R. Considine
Executive Vice President
and Chief Financial Officer
  William A. Tozzi
Vice President and
Controller


33


   
  Becton, Dickinson and Company
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, 2005 and 2004, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three years in the period ended September 30, 2005. 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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.

    As discussed in Notes 2 and 13 to the consolidated financial statements, effective October 1, 2004, the Company adopted Financial Accounting Standard No. 123(R), “Share-Based Payment.”

    We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Becton, Dickinson and Company’s internal control over financial reporting as of September 30, 2005, 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 18, 2005, expressed an unqualified opinion thereon.

 
     
  ERNST & YOUNG LLP
New York, New York
November 18, 2005


34


   
  Becton, Dickinson and Company
Report of Independent Registered
Public Accounting Firm
 

 

To the Shareholders and Board of Directors of
Becton, Dickinson and Company

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Becton, Dickinson and Company maintained effective internal control over financial reporting as of September 30, 2005, 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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, 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, management’s assessment that Becton, Dickinson and Company maintained effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Becton, Dickinson and Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005, 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, 2005 and 2004, and the related consolidated statements of income, comprehensive income and cash flows for each of the three years in the period ended September 30, 2005 and our report dated November 18, 2005 expressed an unqualified opinion thereon.

 
     
  ERNST & YOUNG LLP
New York, New York
November 18, 2005


35


   
  Becton, Dickinson and Company
Financial Statements  

 

Consolidated Statements of Income
Years Ended September 30
Thousands of dollars, except per-share amounts

  2005       2004   2003  
Operations                    
Revenues $ 5,414,681     $ 4,934,745   $ 4,463,509  
                     
Cost of products sold   2,662,029       2,500,362     2,296,637  
Selling and administrative expense   1,449,856       1,311,467     1,181,403  
Research and development expense   271,626       235,649     224,237  
Litigation settlement         100,000      
                     
Total Operating Costs and Expenses   4,383,511       4,147,478     3,702,277  
                     
Operating Income   1,031,170       787,267     761,232  
Interest expense   (55,673 )     (44,832 )   (43,477 )
Interest income   36,421       15,225     6,928  
Other expense, net   (7,064 )     (4,792 )   (2,725 )
                     
Income From Continuing Operations
    Before Income Taxes
  1,004,854       752,868     721,958  
                     
Income tax provision   312,571       170,364     167,028  
                     
Income from Continuing Operations   692,283       582,504     554,930  
                     
Income (loss) from Discontinued Operations
     Net of income tax benefit of
        $14,439, $7,961 and $4,378
  29,980       (115,102 )   (7,874 )
                     
Net Income $ 722,263     $ 467,402   $ 547,056  
                     
Basic Earnings Per Share                    
                     
Income from Continuing Operations $ 2.75     $ 2.30   $ 2.17  
Income (loss) from Discontinued Operations $ 0.12     $ (0.46 ) $ (0.03 )
Basic Earnings Per Share(A) $ 2.87     $ 1.85   $ 2.14  
                     
Diluted Earnings Per Share                    
Income from Continuing Operations $ 2.66     $ 2.21   $ 2.10  
Income (loss) from Discontinued Operations $ 0.11     $ (0.44 ) $ (0.03 )
Diluted Earnings Per Share $ 2.77     $ 1.77   $ 2.07  
(A) Total per share amounts may not add due to rounding.
See notes to consolidated financial statements

36


Financial Statements  Becton, Dickinson and Company

 

Consolidated Statements of Comprehensive Income
Years Ended September 30
Thousands of dollars

  2005     2004   2003  
                     
Net Income $ 722,263     $ 467,402   $ 547,056  
                     
Other Comprehensive (Loss) Income, Net of Tax                    
    Foreign currency translation adjustments   (17,742 )     83,522     207,107  
    Minimum pension liability adjustment   4,494       (6,730 )   (9,248 )
    Unrealized (loss) gain on investments, net of amounts recognized   (1,112 )     242     9,653  
    Unrealized loss on cash flow hedges, net of amounts realized   (135 )     (2,461 )   (5,499 )
                     
Other Comprehensive (Loss) Income, Net of Tax   (14,495 )     74,573     202,013  
Comprehensive Income $ 707,768     $ 541,975   $ 749,069  
See notes to consolidated financial statements

37


Financial Statements  Becton, Dickinson and Company.

 

Consolidated Balance Sheets
Years Ended September 30
Thousands of dollars, except per-share amounts and numbers of shares

  2005     2004  
Assets              
Current Assets              
    Cash and equivalents $ 1,042,890     $ 719,378  
    Short-term investments   86,808       32,119  
    Trade receivables, net   842,806       807,380  
    Inventories   775,949       738,778  
    Prepaid expenses, deferred taxes and other   226,861       279,985  
    Assets held for sale         63,694  
        Total Current Assets   2,975,314       2,641,334  
Property, Plant and Equipment, Net   1,933,718       1,880,997  
Goodwill   470,049       473,211  
Core and Developed Technology, Net   165,381       188,541  
Other Intangibles, Net   101,558       93,466  
Capitalized Software, Net   229,793       283,918  
Other   196,156       191,112  
    Total Assets $ 6,071,969     $ 5,752,579  
               
Liabilities              
Current Liabilities              
    Short-term debt $ 206,509     $ 49,289  
    Accounts payable   252,262       206,941  
    Accrued expenses   439,894       384,936  
    Salaries, wages and related items   329,864       307,996  
    Income taxes   70,846       86,739  
    Liabilities held for sale         14,181  
        Total Current Liabilities   1,299,375       1,050,082  
Long-Term Debt   1,060,833       1,171,506  
Long-Term Employee Benefit Obligations   301,933       374,222  
Deferred Income Taxes and Other   125,876       88,906  
               
Commitments and Contingencies          
               
Shareholders’ Equity              
ESOP convertible preferred stock–$1 par value: authorized–1,016,949 shares;
    issued and outstanding–527,819 shares in 2004
        31,142  
Preferred stock, series A - $1 par value: authorized–500,000 shares; none issued          
Common stock–$1 par value: authorized–640,000,000 shares;
    issued–332,662,160 shares in 2005 and 2004
  332,662       332,662  
Capital in excess of par value   615,846       414,515  
Retained earnings   4,805,852       4,264,778  
Deferred compensation   10,280       10,222  
Common stock in treasury–at cost–84,977,933 shares in 2005
    and 83,327,295 shares in 2004
  (2,297,493 )     (1,816,756 )
Accumulated other comprehensive loss   (183,195 )     (168,700 )
    Total Shareholders’ Equity   3,283,952       3,067,863  
Total Liabilities and Shareholders Equity $ 6,071,969     $ 5,752,579  
See notes to consolidated financial statements

38


Financial Statements  Becton, Dickinson and Company

 

Consolidated Statements of Cash Flows
Years Ended September 30
Thousands of dollars

  2005     2004   2003  
Operating Activities                    
Net income $ 722,263     $ 467,402   $ 547,056  
(Income) loss from discontinued operations, net   (29,980 )     115,102     7,874  
Income from continuing operations, net   692,283       582,504     554,930  
Adjustments to income from continuing operations to
    derive net cash provided by continuing operating activities:
                   
        Depreciation and amortization   387,496       357,224     335,759  
        Share-based compensation   70,199       2,466      
        Deferred income taxes   63,229       (31,345 )   5,921  
        BGM charges         38,551      
        Change in operating assets:                    
            Trade receivables   (41,618 )     (15,854 )   31,450  
            Inventories   (44,346 )     30,096     (49,854 )
            Prepaid expenses, deferred taxes and other   12,636       (2,466 )   8,596  
            Accounts payable, income taxes and other liabilities   142,254       99,447     65,500  
        Pension obligation   (58,842 )     48,045     (47,382 )
        Other, net   638       (5,942 )   (1,987 )
Net Cash Provided by Continuing Operating Activities   1,223,929       1,102,726     902,933  
                     
Investing Activities                    
Capital expenditures   (317,628 )     (265,718 )   (259,218 )
Capitalized software   (18,922 )     (39,190 )   (64,782 )
Change in short-term investments   (43,775 )     (31,298 )   1,975  
Purchases of long-term investments   (1,171 )     (10,149 )   (4,399 )
Acquisition of business, net of cash acquired         (24,251 )    
Proceeds from discontinued operations   62,051            
Other, net   (62,566 )     (24,628 )   (21,987 )
Net Cash Used for Continuing Investing Activities   (382,011 )     (395,234 )   (348,411 )
                     
Financing Activities                    
Change in short-term debt   157,211       (56,509 )   (319,608 )
Proceeds of long-term debt             404,683  
Payment of long-term debt   (104,522 )     (21,682 )   (6,386 )
Repurchase of common stock   (549,999 )     (449,930 )   (349,998 )
Issuance of common stock   123,494       173,606     86,618  
Excess tax benefit from stock option exercises   31,545            
Dividends paid   (182,236 )     (152,376 )   (104,148 )
Net Cash Used for Continuing Financing Activities   (524,507 )     (506,891 )   (288,839 )
Net Cash Provided by (Used for) Discontinued Operations   2,245       (2,726 )   (1,003 )
Effect of exchange rate changes on cash and equivalents   3,856       1,617     12,091  
Net Increase in Cash and Equivalents   323,512       199,492     276,771  
Opening Cash and Equivalents   719,378       519,886     243,115  
Closing Cash and Equivalents $ 1,042,890     $ 719,378   $ 519,886  
See notes to consolidated financial statements

39


   
  Becton, Dickinson and Company
Notes to Consolidated
Financial Statements
 

Thousands of dollars, except per-share amounts
and numbers of shares


Index
Note
  Subject Page  
 1   Summary of Significant Accounting Policies   40  
 2   Accounting Changes   42  
 3   Other Intangible Assets   43  
 4   Benefit Plans   44  
 5   Acquisition   47  
 6   Income Taxes   48  
 7   Supplemental Financial Information   49  
 8   Debt   50  
 9   Financial Instruments   51  
10   Shareholders’ Equity   53  
11   Other Comprehensive (Loss) Income   54  
12   Commitments and Contingencies   54  
13   Share-Based Compensation   56  
14   Earnings Per Share   58  
15   Segment Data   59  
16   Litigation Settlement   60  
17   Discontinued Operations   60  
18   Employee Stock Ownership Plan/      
    Savings Incentive Plan   61  
19   Blood Glucose Monitoring Charges   62  

1   Summary of Significant Accounting Policies

Principles of Consolidation
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 and none that require consolidation.

Reclassifications
The Company has reclassified certain prior year information to conform with the current year presentation.

Cash Equivalents
Cash equivalents are stated at cost plus accrued interest, which approximates market. The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents.

Inventories
Inventories are stated at the lower of first-in, first-out cost or market.

Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amor-ti­­zation are principally provided on the straight-line basis over estimated useful lives, which range from 20 to 45 years for buildings, four to 10 years for machinery and equipment and two to 17 years for leasehold improvements. Depreciation expense was $243,355, $221,545 and $217,553 in fiscal 2005, 2004 and 2003, respectively.

Goodwill and Other Intangible Assets
Goodwill is reviewed annually for impairment in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” In reviewing goodwill for impairment, potential impairment is identified by comparing the estimated fair value of a reporting unit with its carrying value. Core and developed



40


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

technology continues to be amortized over periods ranging from 15 to 20 years, using the straight-line method. Both goodwill and core and developed technology arise from acquisitions. Other intangibles with finite useful lives, which include patents, are amortized over periods principally ranging from two to 40 years, using the straight-line method. These intangibles, including core and developed technology, are periodically reviewed when impairment indicators are present to assess recoverability from future operations using undiscounted cash flows in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 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. Therefore, in accordance with the provisions of SFAS No. 142, these trademarks are no longer amortized but are reviewed annually for impairment. See Note 3 for further discussion.

Capitalized Software
Capitalized software, including costs capitalized in accordance with the AICPA’s Statement of Position 98-1, “Accounting for Costs of Computer 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. Amortization expense was $71,416, $66,319 and $52,602 for 2005, 2004 and 2003, respectively.

Foreign Currency Translation
Generally, 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.

Revenue Recognition
Revenue from product sales are recognized when title and risk of loss pass to the customer. For the sale of certain instruments in the Biosciences segment, revenue is recognized upon completion of installation at the customer’s site. Based upon the terms of sales arrangements entered into beginning in the fourth quarter of 2003, the Biosciences segment began to recognize revenue in accordance with Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables.” These sales arrangements have multiple deliverables and, as such, are divided into separate units of accounting. Revenue and cost of products sold are recognized at the completion of each deliverable based on the relative fair values of items delivered.

    The Company’s domestic businesses sell products primarily to distributors who resell the products to end-user customers. Rebates are provided to distributors that sell to end-user customers at prices determined under a contract between the Company and the end-user customer. Provisions for rebates, as well as sales discounts and returns, are accounted for as a reduction of revenues when revenue is recognized.

Shipping and Handling Costs
Shipping and handling costs are included in Selling and administrative expense. Shipping expense was $219,617, $205,280 and $190,472 in 2005, 2004 and 2003, respectively.

Derivative Financial Instruments
In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, 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. See Note 9 for additional discussion on financial instruments.

    Derivative financial instruments are utilized by the Company in the management of its foreign currency and interest rate exposures. The Company hedges its foreign currency exposures by entering into offsetting forward exchange contracts and currency options, when it deems appropriate. The Company utilizes interest rate swaps and forward rate agreements to manage its exposure to fluctuating interest rates. The Company does not use derivative financial instruments for trading or speculative purposes.



41


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    Any deferred gains or losses associated with derivative instruments, which on infrequent occasions may be terminated prior to maturity, 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.

Income Taxes
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 maintains valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances are included in our tax provision in the period of change. In determining whether a valuation allowance is warranted, management evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset.

Earnings Per Share
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.

Use of Estimates
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.

Share-Based Compensation
Effective October 1, 2004, the Company adopted SFAS No. 123 (revised 2004)–“Share-Based Payment” (“SFAS No. 123 (R)”). This statement requires compensation expense to be measured based on the estimated fair value of the share-based awards and recognized in income on a straight-line basis over the requisite service period, which is generally the vesting period. See Note 2 regarding the Company’s adoption of SFAS No. 123(R).

    Prior to October 1, 2004, the Company accounted for share-based compensation under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation expense for stock options was measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the exercise price. The Company had not recognized any stock compensation expense under this method in 2004 and 2003, as the exercise price of stock options equaled the market value of the Company’s stock on the date of grant.


2   Accounting Changes

Share-Based Compensation
The Company adopted SFAS No. 123(R) effective October 1, 2004. This statement requires compensation expense relating to share-based payments to be recognized in net income using a fair-value measurement method. Under the fair value method, the estimated fair value of awards is charged to income on a straight-line basis over the requisite service period, which is generally the vesting period. The Company elected the modified prospective method as prescribed in SFAS No. 123(R) and therefore, prior periods were not restated. Under the modified prospective method, this statement was applied to new awards granted after the time of adoption, as well as to the unvested portion of previously granted equity-based awards for which the requisite service had not been rendered as of October 1, 2004. The Company granted stock options and restricted stock unit awards in November 2004 under the 2004 Employee and Director Equity-Based Compensation Plan (the “2004 Plan”), its new long-term incentive program. See Note 13 for further discussion.



42


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    Share-based compensation expense in 2005 reduced the Company’s results of operations as follows:

  2005    
Income From Continuing Operations        
Before Income Taxes   $ 70,199    
Net Income(A) $ 50,258    
Basic Earnings Per Share(A) $ 0.20    
Diluted Earnings Per Share(A) $ 0.19    
(A) Share-based compensation attributable to discontinued operations was not material.

    Prior to October 1, 2004, the Company accounted for share-based employee compensation under the provisions of SFAS No. 123 using the intrinsic value method prescribed by APB No. 25 and related interpretations. Under the intrinsic value method, no compensation expense was recognized for stock options, as the exercise price of employee stock options equaled the market value of the Company’s stock on the date of grant. The following pro-forma net income and earnings per share information has been determined as if the Company had accounted for its share-based compensation awards issued using the fair value method in 2004 and 2003.

     2004   2003  
Net Income, as reported   $ 467,402 (A)     $ 547,056  
Less share-based compensation expense, net of tax     32,027     35,941  
Pro-forma net income   $ 435,375   $ 511,115  
Reported earnings per share:              
   Basic   $ 1.85   $ 2.14  
   Diluted   $ 1.77   $ 2.07  
Pro-forma earnings per share:              
   Basic   $ 1.72   $ 2.00  
   Diluted   $ 1.66   $ 1.95  
(A) Includes $2,466 of share-based compensation expense relating to restricted stock units granted in November 2003.

    The pro-forma amounts and fair value of each option grant were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004 and 2003: risk-free interest rates of 3.85% and 3.66%, respectively; expected volatility of 32.5% and 33.2%, respectively; expected dividend yields of 1.16% and 1.21%, respectively; and expected lives of six years for each year presented. The Black-Scholes model is a trading pricing model that does not reflect either the non-traded nature of employee stock options or the limited transferability of such

options. This model also does not consider restrictions on trading for all employees, including certain restrictions imposed on senior management of the Company. Therefore, if the Company had used an option pricing model other than Black-Scholes, pro-forma results different from those shown above may have been reported.

Other Postretirement Benefits
The Company adopted Financial Accounting Standards Board Staff Position (“FSP”) 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”), on a prospective basis effective January 1, 2004. The Act introduces a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare. This adoption resulted in a reduction of the Company’s accumulated postretirement benefit obligation of $26,409 at October 1, 2003 and a reduction of the net periodic benefit cost of $3,654 and $2,053 for the years ended September 30, 2005 and 2004, respectively. See Note 4 for more information about the Company’s benefit plans.


3   Other Intangible Assets

Other intangible assets at September 30 consisted of:

  2005     2004  
  Gross
Carrying
Amount
  Accumulated
Amortization
    Gross
Carrying
Amount
  Accumulated
Amortization
Amortized intangible 
   assets
                         
Core and developed                          
   technology   $ 274,615   $ 109,234     $ 297,342   $ 108,801  
Patents, trademarks,                          
   and other   338,391     246,060       311,682     229,047  
  $ 613,006   $ 355,294     $ 609,024   $ 337,848  
Unamortized                          
   intangible assets                          
Trademarks $ 9,227           $ 10,831        


43


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    Intangible amortization expense was $33,405, $31,467 and $31,413 in 2005, 2004 and 2003, respectively. The estimated aggregate amortization expense for the fiscal years ending September 30, 2006 to 2010 are as follows: 2006–$32,600; 2007–$32,600; 2008–$31,500; 2009–$29,000; 2010–$27,700.

    During 2003, the Company decided to discontinue the development of certain products and product applications associated with the BD IMAGN instrument platform in the Biosciences segment. As a result, the Company recorded an impairment loss of $26,717 in Cost of products sold. This loss included the write down of $25,230 of core and developed technology, $960 of indefinite-lived trademarks and $527 of licenses.

4   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 post-retirement healthcare and life insurance benefits to qualifying domestic retirees. Postretirement healthcare and life insurance benefit plans in foreign countries are not material. The measurement date used for the Company’s employee benefit plans is September 30.

    Net pension and other postretirement cost included the following components:



  Pension Plans   Other Postretirement Benefits  
  2005     2004   2003   2005       2004   2003  
Service cost    $ 61,836     $ 57,013   $ 44,798      $ 3,657     $ 3,510   $ 3,159  
Interest cost   66,837       62,825     54,072     15,321       14,492     14,484  
Expected return on plan assets   (59,372 )     (51,923 )   (47,190 )              
Amortization of prior service cost   211       180     85     (6,233 )     (6,233 )   (6,233 )
Amortization of loss   22,951       17,586     13,121     6,164       4,116     3,342  
Amortization of net obligation   134       132     11                
Net curtailment gain         (300 )   (147 )              
Net pension and postretirement costs $ 92,597     $ 85,513   $ 64,750   $ 18,909     $ 15,885   $ 14,752  

44


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    Net pension cost attributable to foreign plans included in the preceding table was $16,772, $16,053 and $13,302 in 2005, 2004 and 2003, respectively.

    The change in benefit obligation, change in plan assets, funded status and amounts recognized in the Consolidated Balance Sheets for these plans were as follows:



  Pension Plans   Other Postretirement Benefits
  2005     2004   2005     2004
Change in benefit obligation:                            
Benefit obligation at October 1    $ 1,185,394     $ 1,058,645      $ 263,678     $ 255,106  
Service cost   61,836       57,013     3,657       3,510  
Interest cost   66,837       62,825     15,321       14,492  
Plan amendments   195       761            
Benefits paid   (57,818 )     (55,401 )   (22,279 )     (18,282 )
Actuarial loss   164,161       46,726     20,820       35,261  
Other, includes translation   (7,513 )     14,825           (26,409 )(A)
Benefit obligation at September 30 $ 1,413,092     $ 1,185,394   $ 281,197     $ 263,678  
                             
Change in plan assets:                            
Fair value of plan assets at October 1 $ 735,167     $ 685,585   $     $  
Actual return on plan assets   109,778       56,018            
Employer contribution   151,439       37,468            
Benefits paid   (57,818 )     (55,401 )          
Other, includes translation   (4,646 )     11,497            
Fair value of plan assets at September 30 $ 933,920     $ 735,167   $     $  
                             
Funded status at September 30:                            
Unfunded benefit obligation $ (479,172 )   $ (450,227 ) $ (281,197 )   $ (263,678 )
Unrecognized net transition obligation   (904 )     1,150            
Unrecognized prior service cost   6,154       4,321     (19,153 )     (25,386 )
Unrecognized net actuarial loss   509,765       420,678     106,811       93,033  
Prepaid (accrued) benefit cost $ 35,843     $ (24,078 ) $ (193,539 )   $ (196,031 )
                             
Amounts recognized in the Consolidated
Balance Sheets at September 30 are as follows:
                           
Prepaid benefit cost $ 39,005     $ 25,857   $     $  
Intangible asset   1,327       1,168            
Accrued benefit liability   (148,403 )     (201,650 )   (193,539 )     (196,031 )
Accumulated other comprehensive loss 
   before income taxes
  143,914       150,547            
Net amount recognized $ 35,843     $ (24,078 ) $ (193,539 )   $ (196,031 )
(A) Relates to the adoption of FSP 106-2 as discussed in Note 2.

45


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    Foreign pension plan assets at fair value included in the preceding table were $261,841 and $207,765 at September 30, 2005 and 2004, respectively. The foreign pension plan projected benefit obligations were $339,466 and $279,029 at September 30, 2005 and 2004, respectively.

    The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $1,149,504, $840,405 and $695,635, respectively as of September 30, 2005 and $1,034,223, $796,256 and $597,155, respectively as of September 30, 2004.

    The assumptions used in determining pension plan information were as follows:

  2005     2004   2003
Net Cost                    
Discount rate:                    
  U.S. plans(A)   6.00 %       6.25 %   6.75 %
  Foreign plans (average)   4.95       4.90     5.18  
Expected return on plan assets:
  U.S. plans
  8.00       8.00     8.00  
  Foreign plans (average)   6.60       6.72     7.15  
Rate of compensation increase:
  U.S. plans(A)
  4.25       4.25     4.00  
  Foreign plans (average)   2.98       2.92     3.17  
                     
Benefit Obligation                    
Discount rate:                    
  U.S. plans(A)   5.50       6.00     6.25  
  Foreign plans (average)   4.19       4.95     4.90  
Rate of compensation increase:                    
  U.S. plans(A)   4.25       4.25     4.25  
  Foreign plans (average)   2.92       2.98     2.92  
(A) Also used to determine other postretirement benefit plan information.

    At September 30, 2005 the assumed healthcare trend rates were 10% pre and post age 65, gradually decreasing to an ultimate rate of 5% beginning in 2011. At September 30, 2004 the corresponding assumed healthcare trend rates were 10% pre and post age 65, gradually decreasing to an ultimate rate

of 5% beginning in 2010. A one percentage point increase in assumed healthcare cost trend rates in each year would increase the accumulated postretirement benefit obligation as of September 30, 2005 by $14,404 and the aggregate of the service cost and interest cost components of 2005 annual expense by $821. A one percentage point decrease in the assumed healthcare cost trend rates in each year would decrease the accumulated postretirement benefit obligation as of September 30, 2005 by $12,802 and the aggregate of the 2005 service cost and interest cost by $713.

Expected Funding
The Company’s funding policy for its defined benefit pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that may be appropriate considering the funded status of the plans, tax consequences, the cash flow generated by the Company and other factors. While the Company will not be required to fund any of its pension plans in 2006, the Company made a discretionary contribution to its U.S. pension plan in October 2005 of $150 million.

    Expected benefit payments are as follows:

  Pension
Plans
  Other
Postretirement
Benefits
2006 $ 67,230   $ 21,652  
2007   61,005     21,983  
2008   66,919     22,316  
2009   76,686     22,593  
2010   83,315     22,848  
2011–2015   562,418     113,917  

    Expected receipts of the subsidy under the Act, as discussed in Note 2, which are not reflected in the expected other post-retirement benefit payments included in the preceding table, are as follows: 2006, $2,378; 2007, $2,275; 2008, $2,296; 2009, $2,287; 2010, $2,245; 2011–2015, $10,272.



46


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    The Company’s asset allocation for its defined benefit pension plans at September 30 were as follows:

  2005     2004
Equity securities   63.0 %     66.9 %
Debt securities   34.1       30.1  
Other   2.9       3.0  
Total   100.0 %     100.0 %

Investment Strategy
The Company’s investment objective is to achieve superior returns on plan assets, subject to a prudent level of portfolio risk, for the purpose of enhancing the security of benefits for participants. The Company’s investments include a broad range of equity and fixed income securities. These investments are diversified in terms of domestic and international equity securities, short-term and long-term securities, growth and value styles, as well as small and large capitalization stocks. The Company’s target allocation percentages are as follows: equity securities (58%–69%); fixed-income securities (31%–39%); and cash (0%–3%). Equity securities are held for their expected high return and excess return over inflation. Fixed-income securities are held for diversification relative to equities. The plans may also hold cash to meet liquidity requirements. Due to short-term fluctuations in market conditions, allocation percentages may temporarily deviate from these target allocation percentages before a rebalancing occurs. Investment risks and returns are measured and monitored on an on-going basis through annual liability measurements and quarterly investment portfolio reviews to determine whether the asset allocation targets continue to represent an appropriate balance of expected risk and reward.

    The expected rate of return on plan assets is based upon expectations of long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, the Company considers historical and expected rates of return for the asset classes in which the plan’s assets are invested, as well as current economic and capital market conditions.

    The Company utilizes a service-based approach in applying the provisions of SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” for most of its postemployment benefits. This approach recognizes that actuarial gains and losses may result from experience that differs from baseline assumptions. Postemployment benefit costs were $22,680, $17,295 and $11,561 in 2005, 2004 and 2003, respectively.

5   Acquisition

In July 2004, the Company acquired all of the outstanding equity interests in Atto Bioscience, Inc., a privately held company specializing in optical instrumentation, software and reagents for real-time analysis of interactions taking place in living cells. The purchase price was approximately $25,800 in cash. The purchase price has been allocated to assets acquired and liabilities assumed based on estimated fair values as follows:

Inventories $ 1,780  
Property, plant and equipment   972  
Core and developed technology   5,400  
Goodwill   15,569  
Other assets, net   979  

    In connection with this acquisition, a charge of $1,100 was recorded in connection with purchased in-process research and development. The results of operations of the acquired company were included in the consolidated results of the Company from the acquisition date. Unaudited pro forma consolidated results, after giving effect to this acquisition, would not have been materially different from the reported amounts.



47


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

6   Income Taxes

The provision for income taxes from continuing operations consisted of:

  2005     2004   2003
Current:                    
  Federal   $ 120,172     $ 91,669   $ 103,825  
  State and local, including Puerto Rico   4,269       3,362     3,880  
  Foreign   124,901       106,678     53,402  
    249,342       201,709     161,107  
Deferred:                    
  Domestic   75,948       (4,308 )   6,209  
  Foreign   (12,719 )     (27,037 )   (288 )
    63,229       (31,345 )   5,921  
  $ 312,571     $ 170,364   $ 167,028  

    The components of Income From Continuing Operations Before Income Taxes consisted of:

  2005     2004   2003  
Domestic, including Puerto Rico   $ 433,670     $ 291,973   $ 355,032  
Foreign   571,184       460,895     366,926  
  $ 1,004,854     $ 752,868   $ 721,958  

    In accordance with SFAS No. 109, “Accounting for Income Taxes,” deferred tax assets and liabilities are netted on the balance sheet by separate tax jurisdictions. At September 30, 2005 and 2004, net current deferred tax assets of $75,382 and $100,605, respectively, were included in Prepaid expenses, deferred taxes and other. There were no net non-current deferred tax assets in 2005 and 2004. Net current deferred tax liabilities of $1,949 and $1,346, respectively, were included in Current Liabilities– Income taxes. Net non-current deferred tax liabilities of $98,007 and $61,819, respectively, were included in Deferred

Income Taxes and Other. Deferred taxes are not provided on substantially all undistributed earnings of foreign subsidiaries that are indefinitely reinvested. At September 30, 2005, the cumulative amount of such undistributed earnings indefinitely reinvested outside the United States was $655,617. Determining the tax liability that would arise if these earnings were remitted is not practicable. Deferred taxes are provided for earnings outside the United States when those earnings are not considered indefinitely reinvested.

    In October 2004, the American Jobs Creations Act of 2004 (the “AJCA”) was signed into law. The AJCA creates a temporary incentive for U.S. multinationals to repatriate accumulated income earned outside the United States. As a result of the passage of the AJCA, the Company revisited its policy of indefinite reinvestment of foreign earnings and determined that it will repatriate approximately $1.3 billion in 2006. The Company recorded a one-time charge of $77,200 in the fourth quarter of 2005 attributable to the planned repatriation of these earnings.

    Deferred income taxes at September 30 consisted of:

  2005     2004  
  Assets   Liabilities     Assets   Liabilities  
Compensation and benefits   $ 154,085   $     $ 170,148   $  
Property and equipment       147,188           141,382  
Repatriation of foreign                          
      earnings under the AJCA       77,200            
Loss and credit carryforwards   78,806           33,552      
Other   178,244     139,205       127,200     124,723  
    411,135     363,593       330,900     266,105  
Valuation allowance   (72,116 )         (27,355 )    
  $ 339,019   $ 363,593     $ 303,545   $ 266,105  


48


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    Valuation allowances have been established for capital loss carryforwards, state deferred tax assets, net of federal tax, related to net operating losses and credits and other deferred tax assets for which the Company has determined it is more likely than not that these benefits will not be realized. At September 30, 2005, the Company had deferred state tax assets for net state operating losses and credit carryforwards of $30,667 for which a valuation allowance has been established due to the uncertainty of generating sufficient taxable income in the state jurisdictions to utilize the deferred tax assets before they principally expire between 2006 and 2012. The Company also has federal and state capital loss carryforward deferred tax assets of $37,626 for which a full valuation allowance has been established due to the uncertainty of recognizing the benefit from these losses before they principally expire in 2010.

    A reconciliation of the federal statutory tax rate to the Company’s effective tax rate was as follows:

   2005      2004    2003
Federal statutory tax rate   35.0     35.0 %    35.0 %
State and local income taxes,
  net of federal tax benefit
   0.6         0.3       0.4   
Effect of foreign and Puerto Rico
  earnings and foreign tax credits
  (10.3 )     (9.9 )    (8.4 )
Effect of Research, Empowerment
  Zone, Extraterritorial Income

  tax benefits
   (2.0 )      (2.5 )    (3.0 )
Repatriation of foreign earnings
  under the AJCA
  7.7                
Other, net   0.1        (0.3 )    (0.9 )
     31.1 %      22.6 %    23.1 %

    The approximate dollar and diluted earnings per share amounts of tax reductions related to tax holidays in various countries in which the Company does business were: 2005–$75,150 and $0.29; 2004–$55,461 and $0.21; and 2003–$42,050 and $0.16. The tax holidays expire at various dates through 2023.

    The Company made income tax payments, net of refunds, of $183,867 in 2005, $146,574 in 2004 and $110,739 in 2003.

7   Supplemental Financial Information

Other Expense, Net
Other expense, net in 2005 totaled $7,064, which included foreign exchange losses (net of hedging costs) of $3,976 and net write downs of certain investments of $3,519.

    Other expense, net in 2004 totaled $4,792, which included write downs and losses on certain investments of $6,951. These amounts were partially offset by gains on the sale of certain investments of $1,293.

    Other expense, net in 2003 totaled $2,725, which included write downs of certain investments of $3,030 and the write-off of intangible assets of $1,841. These charges were partially offset by foreign exchange gains of $1,875 (net of hedging costs).

Trade Receivables, Net
Allowances for doubtful accounts and cash discounts netted against trade receivables were $47,609 and $52,361 at September 30, 2005 and 2004, respectively.

Inventories

   2005      2004   
Materials   $ 93,963      $ 96,020  
Work in process   139,772        132,841  
Finished products   542,214        509,917  
  $ 775,949      $ 738,778  

Property, Plant and Equipment, Net

   2005     2004
Land   $ 69,029      $ 62,039  
Buildings   1,214,682        1,162,327  
Machinery, equipment and fixtures   2,955,716        2,811,679  
Leasehold improvements   65,702        68,177  
    4,305,129        4,104,222  
Less allowances for depreciation and amortization   2,371,411        2,223,225  
  $ 1,933,718      $ 1,880,997  


49


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

8   Debt

The components of Short-term debt consisted of:

   2005     2004
Loans payable:               
  Domestic   $ 200,000      $ 33,100  
  Foreign   6,125        15,729  
Current portion of long-term debt   384        460  
  $ 206,509      $ 49,289  

    Domestic loans payable consist of commercial paper. Foreign loans payable consist of short-term borrowings from financial institutions. The weighted average interest rates for loans payable were 3.8% and 2.1% at September 30, 2005 and 2004, respectively. The Company has in place a syndicated credit facility totaling $900 million in order to provide backup support for our commercial paper program and for other general corporate purposes. This credit facility expires in August 2009. Restrictive covenants include a minimum interest coverage ratio. There were no borrowings outstanding under the facility at September 30, 2005. In addition, the Company had short-term foreign lines of credit pursuant to informal arrangements of approximately $207,000 at September 30, 2005, of which $198,000 was unused.

    Long-Term Debt consisted of:

   2005     2004   
Domestic notes due through 2013
    (average year-end interest rate:
     3.2%–2005; 2.3%–2004)
  $ 10,194      $ 10,415  
Foreign notes due through 2007
     (average year-end interest rate:
    15.0%–2005 and 2004)
  34        17  
6.90% Notes due October 1, 2006   99,937        102,436  
7.15% Notes due October 1, 2009   210,153        221,381  
4.55% Notes due April 15, 2013   198,349        198,169  
4.90% Notes due April 15, 2018   207,116        199,177  
8.70% Debentures due January 15, 2025          104,861  
7.00% Debentures due August 1, 2027   168,000        168,000  
6.70% Debentures due August 1, 2028   167,050        167,050  
  $ 1,060,833      $ 1,171,506  

   On January 15, 2005, the Company exercised the early redemption option available under the terms of our 8.7% Debentures, due January 15, 2025. Redemption was for the full $100 million in outstanding principal at a price of 103.949%. The Company had utilized an interest rate swap (designated as a fair value hedge) to effectively convert the fixed rate of interest under the debentures to a floating rate. The swap was terminated during the first quarter of 2005, which resulted in a gain, which largely offset the early redemption premium on the debentures.

    In March 2003, the Company filed a registration statement with the Securities and Exchange Commission for one or more offerings of debt securities, common stock, warrants, purchase contracts and units, up to a total dollar amount of $750,000, including $100,000 of securities carried forward from a registration filed in October 1997. The remaining availability under the March 2003 registration statement is $350,000.

    Long-term debt balances as of September 30, 2005 and 2004 have been impacted by certain interest rate swaps that have been designated as fair value hedges, as discussed in Note 9.



50


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    The aggregate annual maturities of long-term debt during the fiscal years ending September 30, 2007 to 2010 are as follows: 2007–$100,344; 2008–$393; 2009–$414; 2010–$210,589.

    The Company capitalizes interest costs as a component of the cost of construction in progress. The following is a summary of interest costs:

   2005     2004   2003
Charged to operations   $ 55,673      $ 44,832   $ 43,477  
Capitalized   14,770        12,203     10,346  
  $ 70,443      $ 57,035   $ 53,823  

    Interest paid, net of amounts capitalized, was $68,527 in 2005, $40,730 in 2004 and $32,649 in 2003.


9   Financial Instruments

Foreign Exchange Derivatives
The Company uses foreign exchange forward contracts and currency options to reduce the effect of fluctuating foreign exchange rates on certain foreign currency denominated receivables and payables, third party product sales and investments in foreign subsidiaries. Gains and losses on the derivatives are intended to offset gains and losses on the hedged transaction. The Company’s foreign currency risk exposure is in Europe, Asia Pacific, Canada, Japan and Latin America.

    The Company hedges substantially all of its transactional foreign exchange exposures, primarily intercompany payables and receivables, through the use of forward contracts and currency

options with maturities of less than 12 months. Gains or losses on these contracts are largely offset by gains and losses on the underlying hedged items. These foreign exchange contracts do not qualify for hedge accounting under SFAS No. 133.

    In addition, the Company enters into option and forward contracts to hedge certain forecasted sales that are denominated in foreign currencies. These contracts are designated as cash flow hedges, as defined by SFAS No. 133, and are effective as hedges of these revenues. These contracts are intended to reduce the risk that the Company’s cash flows from certain third party transactions will be adversely affected by changes in foreign currency exchange rates. Changes in the effective portion of the fair value of these contracts are included in other comprehensive income until the hedged sales transactions are recognized in earnings. Once the hedged transaction occurs, the gain or loss on the contract is recognized from Accumulated other comprehensive loss to revenues. The Company recorded hedge net losses, exclusive of hedging costs, of $1,876, $9,110 and $1,732 to revenues in fiscal 2005, 2004 and 2003, respectively. Fiscal 2005, 2004 and 2003 revenues are net of hedging costs of $17,286, $15,124 and $9,876, respectively, related to the purchased option contracts. The Company records in Other expense, net, the premium or cost of the forward contracts, which is excluded from the assessment of hedge effectiveness. The net cost was $236 in fiscal 2005 and the net premium was $618 and $993 in fiscal 2004 and 2003, respectively. All outstanding contracts that were designated as cash flow hedges as of September 30, 2005 will mature by September 30, 2006. At September 30, 2005 and 2004, Accumulated other com-prehensive loss included an unrealized gain of $872 and an unrealized loss of $5,106, respectively, net of tax, relating to foreign exchange derivatives that have been designated as cash flow hedges.

    The Company enters into forward exchange contracts to hedge its net investments in certain foreign subsidiaries. These forward contracts are designated and effective as net investment hedges, as defined by SFAS No. 133. The Company recorded losses of $2,390, $3,690 and $15,304 in fiscal 2005, 2004 and 2003, respectively, to foreign currency translation adjustments in other Accumulated comprehensive loss for the change in the fair value of the contracts.



51


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

Interest Rate Derivatives
The Company’s policy is to manage interest cost using a mix of fixed and floating rate debt. The Company has entered into interest rate swaps in which it agrees to exchange, 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, as defined by SFAS No. 133. For fair value hedges, 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. For cash flow hedges, changes in the fair value of the interest rate swaps are offset by amounts recorded in other comprehensive (loss) income. There was no ineffective portion to the hedges recognized in earnings during the period. If interest rate derivatives designated as cash flow hedges mature or are terminated, then the balance in other comprehensive (loss) income attributable to those derivatives is reclassified into earnings over the remaining life of the hedged debt. The amount that will be reclassified and recorded in Interest expense, net within the next 12 months is $1,753.

    At September 30, 2005 and 2004, Accumulated other comprehensive loss included an unrealized loss of $13,360 and $7,247, respectively, net of tax, relating to interest rate derivatives that have been designated as cash flow hedges.

Fair Value of Financial Instruments
Cash equivalents, short-term investments and short-term debt are carried at cost, which approximates fair value. Equity investments, where a readily determinable market value exists, are classified as available-for-sale securities. Available-for-sale securities are carried at fair value, with unrecognized gains and losses reported in other comprehensive income, net of taxes. Losses on available-for-sale securities are recognized when a loss is determined to be other than temporary or when realized. In accordance with the provisions of SFAS No. 133, forward exchange contracts and currency options are recorded at fair value. Fair values were estimated based on market prices, where available, or dealer quotes. The fair value of certain long-term

debt is based on redemption value. The estimated fair values of the Company’s financial instruments at September 30 were as follows:

   2005     2004  
   Carrying
Value
  Fair
Value
     Carrying
Value
   Fair
Value
 
Assets:                           
  Currency options(A)   $ 16,172   $ 16,172      $ 8,618   $ 8,618  
  Forward exchange contracts(A)              5,805     5,805  
  Interest rate swaps(A)   10,154     10,154        30,142     30,142  
  Equity investments(B)   24,918     24,918        26,661     26,661  
                           
Liabilities:                          
  Forward exchange contracts(C)   5,558     5,558             
  Interest rate swaps(C)   63     63        10,912     10,912  
  Long-term debt   1,060,833     1,113,311        1,171,506     1,228,259  
     
(A) Included in Prepaid expenses, deferred taxes and other.
     
(B) Included in Other non-current assets.
     
(C) Included in Accrued Expenses.

Concentration of Credit Risk
Substantially all of the Company’s trade receivables are due from public and private entities involved in the healthcare industry. Due to the large size and diversity of the Company’s customer base, concentrations of credit risk with respect to trade receivables are limited. The Company does not normally require collateral. Short-term investments consist primarily of liquid investments with high quality financial institutions. The Company is exposed to credit loss in the event of nonperformance by financial institutions with which it conducts business. However, this loss is limited to the amounts, if any, by which the obligations of the counterparty to the financial instrument contract exceed the obligations of the Company. The Company also minimizes exposure to credit risk by dealing with a diversified group of major financial institutions.



52


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

10   Shareholders’ Equity  

Changes in certain components of shareholders’ equity were as follows:

  ESOP
Preferred
Stock
Issued
  Common
Stock
Issued at
Par Value
 
Capital in
Excess of
Par Value
  Retained
Earnings
  Unearned
ESOP
Compensation
  Deferred
Compensation
 

Treasury Stock
 
Shares    Amount
Balance at September 30, 2002   $ 37,945
$ 332,662   $ 185,122   $ 3,507,349   $ (7,847 ) $ 8,496     (77,132,248 ) $ (1,137,583 )
    Net income    
              547,056                          
    Cash dividends:    
                                         
        Common ($.40 per share)    
              (101,612 )                         
        Preferred ($3.835 per share),    
                                         
           net of tax benefits    
              (2,201 )                         
    Common stock issued for:    
                                         
        Employee stock plans, net    
        71,206                       5,048,394     45,357  
        Business acquisitions    
        97                       2,487     24  
    Common stock held in trusts, net    
                          478     (18,440 )   (478 )
    Reduction in unearned ESOP    
                                         
        compensation for the year    
                    4,154                    
    Repurchase of common stock    
                                (9,784,200 )   (349,998 )
    Adjustment for redemption provisions   (3,497
)
        753                       355,125     2,744  
Balance at September 30, 2003 $ 34,448
$ 332,662   $ 257,178   $ 3,950,592   $ (3,693 ) $  8,974     (81,528,882 ) $ (1,439,934 )
    Net income    
              467,402                          
    Cash dividends:    
                                         
        Common ($.60 per share)    
              (151,093 )                         
        Preferred ($3.835 per share),    
                                         
            net of tax benefits    
              (2,123 )                         
    Common stock issued for:    
                                         
        Employee stock plans, net    
        156,478                       7,408,051     71,725  
        Business acquisitions    
        149                       3,545     35  
    Common stock held in trusts, net    
                          1,248     (17,376 )   (1,248 )
    Reduction in unearned ESOP    
                                         
        compensation for the year    
                    3,693                    
    Repurchase of common stock    
                                (9,551,286 )   (449,930 )
    Adjustment for redemption provisions   (3,306
)
        710                       358,653     2,596  
Balance at September 30, 2004 $ 31,142
$ 332,662   $ 414,515   $ 4,264,778   $   $ 10,222     (83,327,295 ) $ (1,816,756 )
    Net income    
              722,263                          
    Cash dividends:    
                                         
        Common ($.72 per share)    
              (181,189 )                         
    Common stock issued for:    
                                         
        Employee stock plans, net    
        124,220                       4,638,097     44,839  
        Business acquisitions    
        206                       4,565     45  
    Share-based compensation    
        70,199                                
    Common stock held in trusts, net    
                          58     40,472     (58 )
    Repurchase of common stock    
                                (9,711,800 )   (549,999 )
    Conversion of ESOP preferred stock   (31,142
)
        6,706                       3,378,028     24,436  
Balance at September 30, 2005 $
  
$ 332,662   $ 615,846   $ 4,805,852   $   $ 10,280     (84,977,933 ) $ (2,297,493 )

53


Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

    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.

Preferred Stock Purchase Rights
In accordance with the Company’s shareholder rights plan, each certificate representing a share of outstanding common stock of the Company also represents one Preferred Stock Purchase Right (a “Right”). Each whole Right entitles the registered holder to purchase from the Company one eight-hundredths of a share of Preferred Stock, Series A, par value $1.00 per share, at a price of $67.50. The Rights will not become exercisable unless and until, among other things, a third party acquires 15% or more of the Company’s outstanding common stock. The Rights are redeemable under certain circumstances at $.01 per Right and will expire, unless earlier redeemed, on April 25, 2006. There are 500,000 shares of preferred stock designated Series A, none of which has been issued.


11   Other Comprehensive (Loss) Income

The components of Accumulated other comprehensive loss were as follows:

   2005     2004   
Foreign currency translation adjustments   $ (90,413 )    $ (72,671 )
Minimum pension liability adjustment   (89,145 )      (93,639 )
Unrealized gains on investments   8,851        9,963  
Unrealized losses on cash flow hedges   (12,488 )      (12,353 )
  $ (183,195 )    $ (168,700 )

    The income tax (benefit) provision recorded in fiscal years 2005 and 2004 for the unrealized gains on investments were $(631) and $285, respectively. The income tax provision (benefit) recorded in fiscal years 2005 and 2004 for cash flow hedges were $534 and $(3,130), respectively. The income tax provision (benefit) recorded in fiscal years 2005 and 2004 for the minimum pension liability adjustment were $2,139 and $(4,042), respectively. Income taxes are generally not provided for translation adjustments.

    The unrealized losses on cash flow hedges included in other comprehensive (loss) income for 2005 and 2004 are net of reclassification adjustments of $11,880 and $15,025, net of tax,

respectively, for realized net hedge losses recorded to revenues. These amounts had been included in Accumulated other comprehensive loss in prior periods. The tax benefits associated with these reclassification adjustments in 2005 and 2004 were $7,282 and $9,209, respectively.


12   Commitments and Contingencies

Commitments
Rental expense for all operating leases amounted to $59,000 in 2005, $59,200 in 2004 and $53,400 in 2003. Future minimum rental commitments on noncancelable leases are as follows: 2006–$42,400; 2007–$34,500; 2008–$24,000; 2009–$15,600; 2010–$10,300 and an aggregate of $15,400 thereafter.

    As of September 30, 2005, the Company has certain future purchase commitments aggregating to approximately $216,100, which will be expended over the next several years.

Contingencies
In 1986, the Company acquired a business that manufactured, among other things, latex surgical gloves. In 1995, the Company divested this glove business. The Company, along with a number of other manufacturers, has been named as a defendant in approximately 524 product liability lawsuits related to natural rubber latex that have been filed in various state and Federal courts. Cases pending in Federal court are being coordinated under the matter In re Latex Gloves Products Liability Litigation (MDL Docket No. 1148) in Philadelphia, and analogous procedures have been implemented in the state courts of California, Pennsylvania, New Jersey and New York. Generally, these actions allege that medical personnel have suffered allergic reactions ranging from skin irritation to anaphylaxis as a result of exposure to medical gloves containing natural rubber latex. Since the inception of this litigation, 463 of these cases have been closed with no liability to the Company (462 of which were closed with prejudice), and 45 cases have been settled for an aggregate de minimis amount.

    The Company, along with another manufacturer and several medical product distributors, is named as a defendant in three product liability lawsuits relating to healthcare workers who allegedly sustained accidental needlesticks, but have not become infected with any disease. Generally, these actions allege that healthcare workers have sustained needlesticks using hollow-bore needle devices manufactured by the Company and, as a result, require medical testing, counseling and/or treatment. In some cases, these actions additionally allege that the healthcare workers have sustained mental anguish. Plaintiffs seek money



54


 Notes to Consolidated Financial Statements   Becton, Dickinson and Company

 

damages in all of these actions. The Company had previously been named as a defendant in eight similar suits relating to healthcare workers who allegedly sustained accidental needlesticks, each of which has either been dismissed with prejudice or voluntarily withdrawn. Regarding the three pending suits:

Ÿ In Ohio, Grant vs. Becton Dickinson et al. (Case No. 98CVB075616, Franklin County Court), which was filed on July 22, 1998, the trial court granted class certification on June 6, 2005. The Company has filed an appeal of the trial court’s ruling.
Ÿ In Oklahoma and South Carolina, cases have been filed on behalf of an unspecified number of healthcare workers seeking class action certification under the laws of these states in state court in Oklahoma, under the caption Palmer vs. Becton Dickinson et al. (Case No. CJ-98-685, Sequoyah County District Court), filed on October 27, 1998, and in state court in South Carolina, under the caption Bales vs. Becton Dickinson et al. (Case No. 98-CP-40-4343, Richland County Court of Common Pleas), filed on November 25, 1998.

    The Company continues to oppose class action certification in these cases, including pursuing all appropriate rights of appeal.

    In Illinois, the matter of McCaster vs. Becton Dickinson (Case No. 04L 012544) was settled on July 5, 2005 for an amount that is not material to the Company’s results of operations, financial condition or cash flows. This case was originally filed as a purported class action needlestick case in the Circuit Court of Cook County and had been refiled in November 2004 as an individual personal injury case.

    A purported class action suit was brought against the Company under the caption Danielle Cardozo, by her litigation guardian Darlene Cardozo v. Becton, Dickinson and Company (Civil Action No. S83059, Supreme Court, British Columbia) on November 6, 2003. The suit alleged personal injury to persons in British Columbia who received test results generated by the BD ProbeTec ET instrument, and sought money damages. The Company has reached a settlement in this case for an amount that is not material to the Company’s results of operations, financial condition or cash flows.

    The Company has insurance policies in place, and believes that a substantial portion of potential liability, if any, in the latex and class action matters would be covered by insurance. In order to protect our rights to additional coverage, the Company filed an action for declaratory judgment under the caption Becton Dickinson and Company vs. Adriatic Insurance Company et al. (Docket No. MID-L-3649-99MT, Middlesex County Superior Court) in New Jersey state court. The Company has withdrawn this action, with the right to refile, so that settlement discussions with the insurance companies may proceed.

    On August 3, 2004, the Company was served with an administrative subpoena issued by the United States Attorney’s Office in Dallas, Texas (the “U.S. Attorney”) in connection with an investigation the U.S. Attorney is conducting of transactions between another company and certain of its suppliers, including the Company. The Company has fully responded to the subpoena. The Company believes that its transactions with the other company have fully complied with the law and that the Company is not currently a target of the investigation.

    On August 8, 2005, the Company received a subpoena issued by the Attorney General of the State of Connecticut, which seeks documents and information relating to the Company’s participation as a member of Healthcare Research & Development Institute, LLC. (“HRDI”), a healthcare trade organization (an independent member of the Company’s board of directors, Gary Mecklenburg, also serves as the non-executive chairman of HRDI). The subpoena indicates that it was issued as part of an investigation into possible violations of the antitrust laws. The Company believes that its participation in HRDI complies fully with the law and has no additional information regarding the investigation at this time. The Company is responding to the subpoena.

    The Company is named as a defendant in five purported class action suits brought on behalf of direct purchasers of the Company’s products, such as distributors, alleging that the Company violated federal antitrust laws, resulting in the charging of higher prices for the Company’s products to the plaintiff and other purported class members. The cases filed are as follows: Louisiana Wholesale Drug Company, Inc., et. al. vs. Becton Dickinson and Company (Civil Action No. 05-1602, U.S. District Court, Newark, New Jersey) filed on March 25, 2005; SAJ Distributors, Inc. et. al. vs. Becton Dickinson & Co. (Case 2:05-CV-04763-JD, United States District Court, Eastern District of Pennsylvania), filed on September 6, 2005; Dik Drug Company, et. al. vs. Becton, Dickinson and Company (Case No. 2:05-CV-04465, U.S. District Court, Newark, New Jersey) filed on September 12, 2005; American Sales Company, Inc. et. al. vs. Becton, Dickinson & Co. (Case No. 2:05-CV-05212-CRM, U.S. District Court, Eastern District of Pennsylvania), filed on October 3, 2005; and Park Surgical Co. Inc. et. al. vs. Becton, Dickinson and Company (Case 2:05-CV-05678-CMR, United States District Court, Eastern District of Pennsylvania), filed on October 26, 2005. The actions brought by Louisiana Wholesale Drug Company and Dik Drug Company in New Jersey have been consolidated under the caption “In re Hypodermic Products Antitrust Litigation.” On June 7, 2005, Jabo’s Pharmacy, Inc. filed a purported class action lawsuit against the Company under the caption Jabo’s Pharmacy, Inc., et. al. v. Becton Dickinson & Company (Case No. 2:05-CV-00162, United States District Court, Greenville, Tennessee)



55


Notes to Consolidated Financial Statements  Becton, Dickinson and Company

 

seeking monetary damages. The complaint alleges that the Company violated federal and various state antitrust laws, resulting in the charging of higher prices for the Company’s products to plaintiff and other purported class members. Unlike the complaints described above, which were brought on behalf of direct purchasers of the Company’s products, the Jabo’s Pharmacy complaint is brought on behalf of indirect purchasers of the Company’s products. The plaintiffs in each of these cases seek monetary damages. The Company has made a motion before the Judicial Panel on Multidistrict Litigation to transfer all of the above actions for coordinated or consolidated pre-trial proceedings. The panel heard the Company’s motion on November 17, 2005, but has not yet issued a decision.

    On August 31, 2005, Daniels Sharpsmart filed suit against the Company, another manufacturer and three group purchasing organizations under the caption Daniels Sharpsmart, Inc. v. Tyco International, (US) Inc., et. al. (Civil Action No. 505CV169, United States District Court, Eastern District of Texas). The plaintiff alleges, among other things, that the Company and the other defendants conspired to exclude the plaintiff from the sharps-collection market by entering into long-term contracts in violation of federal and state antitrust laws, and seeks monetary damages.

    The Company was a defendant in the matter of Dynovation Medical, Inc. et al v. Becton Dickinson and Company (Civil Action No. 505CV73, U.S. District Court, Eastern District of Texas). The plaintiffs in the suit had alleged, among other things, that the Company materially breached its license agreement with Dynovation relating to the BD Insyte Autoguard IV catheter product, and that the Company’s safety blood collection sets infringed certain Dynovation patents. The suit was concluded in September 2005 resulting in the Company receiving a fully-paid up patent license from Dynovation.

    On May 28, 2004, Therasense, Inc. (“Therasense”) filed suit against the Company in the U.S. District Court for the Northern District of California (Case Number: C 04-02123 WDB) asserting that the Company’s blood glucose monitoring products infringe certain Therasense patents. On August 10, 2004, in response to a motion filed by Therasense in the U.S. District Court for the District of Massachusetts, the court transferred to the court in California an action previously filed by the Company against Therasense requesting a declaratory judgment that the Company’s products do not infringe the Therasense patents and that the Therasense patents are invalid.

    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. 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, 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 above, 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 in the period or periods in which they are recorded or paid.


13   Share-Based Compensation

The Company grants share-based awards under the 2004 Plan, which provides for long-term incentive compensation to employees and directors consisting of: stock options, performance-based stock awards, stock appreciation rights, restricted stock units and other stock awards. The Company believes such awards align the interest of its employees and directors with those of its shareholders and encourage employees and directors to act as equity owners of the Company. Prior to the adoption of the 2004 Plan, the Company had employee and director stock option plans, which were terminated with respect to future grants effective upon shareholder approval of the 2004 Plan in February 2004. In 2005 and 2004, the compensation expense for these plans charged to income was $70,199 and $2,466, respectively, and the associated income tax benefit recognized was $19,941 and $937, respectively. No compensation expense was charged to income in 2003.



56


Notes to Consolidated Financial Statements  Becton, Dickinson and Company

 

Stock options
All stock option grants are for a ten-year term. Stock options issued after November 2001 vest over a four-year period. Stock options issued prior to November 2001 vested over a three-year period. Beginning with the November 2004 (fiscal 2005) stock option grants, fair value was estimated on the date of grant using a lattice-based binomial option valuation model that uses the following weighted-average assumptions: risk-free interest rate of 3.93%; expected volatility of 29%; expected dividend yield of 1.28% and expected life of 6.5 years. Expected volatility is based upon historical volatility for the Company’s common stock and other factors. The expected term of options granted is derived from the output of the model, using assumed exercise rates based on historical exercise and termination patterns, and represents the period of time that options 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 weighted average grant date fair value of stock options granted during the years 2005, 2004 and 2003 was $17.16, $13.25 and $10.20, respectively. Stock options granted in 2004 and 2003 were valued based on the grant date fair value of those awards, using the Black-Scholes option pricing model. See Note 2 for further discussion.

    A summary of stock options outstanding as of September 30, 2005, and changes during the year then ended is as follows:

  Stock
Options
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term (Years)
  Aggregate
Intrinsic
Value
 
Balance at October 1   26,926,805   $ 31.15              
Granted   1,808,715     54.44              
Exercised   (4,607,210 )   26.83              
Forfeited, canceled
   or expired
  (400,386 )   35.92              
Balance at
   September 30
  23,727,924   $ 33.68     5.77   $ 444,811  
Vested and expected to
   vest at September 30
  22,898,297   $ 33.49     5.70   $ 433,730  
Exercisable at
   September 30
  15,431,655   $ 30.79     4.66   $ 334,002  

    Cash received from the exercising of stock options in 2005, 2004 and 2003 was $123,613, $173,883 and $86,364, respectively. The actual tax benefit realized for tax deductions from

stock option exercises totaled $44,958, $52,131 and $29,969, respectively. The total intrinsic value of stock options exercised during the years 2005, 2004 and 2003 was $134,342, $157,293 and $91,276, respectively.

Performance-Based Restricted Stock Units
Performance-based restricted stock units cliff vest three years after the date of grant, and are tied to the Company’s performance against pre-established targets, including its compound 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 250% of an employee’s target payout, based on the Company’s actual performance over the three-year performance period. The fair value is based on the market price of the Company’s stock on the date of grant. Compensation cost initially recognized assumes that the target payout level will be achieved and is adjusted for subsequent changes in the expected outcome of performance-related conditions until the vesting date.

    A summary of performance-based restricted stock units outstanding as of September 30, 2005, and changes during the year then ended is as follows:

  Stock
Units
  Weighted
Average
Conversion
Price
  Weighted
Average
Remaining
Contractual
Term (Years)
  Aggregate
Intrinsic
Value
 
Balance at October 1   367,978   $ 38.93              
Granted   1,404,033     54.41              
Converted   (1,009 )   54.41              
Forfeited or canceled   (20,342 )   54.41              
Balance at September 30(A)   1,750,660   $ 51.16     1.94   $ 91,787  
Expected to vest at
   at September 30(B)
  994,973   $ 51.16     1.94   $ 52,166  
(A)  Based on 250% of the target payout.
      
(B) Net of expected forfeited units and units in excess of the expected performance payout of 175,066 and 580,621, respectively.

    The weighted average grant date fair value of performance-based restricted stock units granted during the years 2005 and 2004 was $54.41 and $38.93, respectively.

Time-Vested Restricted Stock Units
Time-vested restricted stock units generally cliff vest three years after the date of grant, except for certain key executives of the Company, including the executive officers, for which such units generally vest one year following the employee’s retirement. The related share-based compensation expense is recorded over the requisite service period, which is the vesting period or in the



57


Notes to Consolidated Financial Statements  Becton, Dickinson and Company

 

case of certain key executives is based on an assumed average retirement age. The fair value of all time-vested restricted stock units is based on the market value of the Company’s stock on the date of grant.

    A summary of time-vested restricted stock units outstanding as of September 30, 2005, and changes during the year then ended is as follows:

  Stock
Units
  Weighted
Average
Conversion
Price
  Weighted
Average
Remaining
Contractual
Term (Years)
  Aggregate
Intrinsic
Value
 
Balance at October 1   77,915   $ 38.78              
Granted   571,669     54.48              
Converted   (5,887 )   54.41              
Forfeited or canceled   (13,640 )   54.41              
Balance at September 30   630,057   $ 52.54     3.47   $ 33,034  
Expected to vest
   at September 30
  567,051   $ 52.54     3.47   $ 29,731  

    The weighted average grant date fair value of time-vested restricted stock units granted during the years 2005 and 2004 was $54.48 and $38.78, respectively.

    The amount of unrecognized compensation expense for all non-vested share-based awards as of September 30, 2005 is approximately $125.4 million, which is expected to be recognized over a weighted-average remaining life of approximately 2.1 years. As of September 30, 2005, 5,931,893 shares remain available for award under the original 9,000,000 share authorization of the 2004 Plan.

    The Company has a policy of satisfying share-based payments through either open market purchases or shares held in treasury. At September 30, 2005, the Company estimates that it has sufficient shares held in treasury to satisfy these payments in 2006.

Other Stock Plans
The Company has a Stock Award Plan, which allows for grants of common shares to certain key employees. Distribution of 25% or more of each award is deferred until after retirement or involuntary termination, upon which the deferred portion of the award is distributable in five equal annual installments. The balance of the award is distributable over five years from the grant date, subject to certain conditions. In February 2004, this plan was terminated with respect to future grants upon the adoption of the 2004 Plan. At September 30, 2005 and 2004, awards for 283,003 and 321,131 shares, respectively were outstanding.

    The Company has a Restricted Stock Plan for Non-Employee Directors which reserves for issuance 300,000 shares of the Company’s common stock. No restricted shares were issued in 2005.

    The Company has a Directors’ Deferral Plan, which provides a means to defer director compensation, from time to time, on a deferred stock or cash basis. As of September 30, 2005, 111,868 shares were held in trust, of which 13,288 shares represented Directors’ compensation in 2005, in accordance with the provisions of the plan. Under this plan, which is unfunded, directors have an unsecured contractual commitment from the Company.

    The Company also has a Deferred Compensation Plan that allows certain highly-compensated employees, including executive officers, to defer salary, annual incentive awards and certain equity-based compensation. As of September 30, 2005, 183,205 shares were issuable under this plan.


14   Earnings Per Share

For the years ended September 30, 2005, 2004 and 2003, the computations of basic and diluted earnings per share (shares in thousands) were as follows:

  2005     2004   2003  
Income from continuing operations  $ 692,283     $ 582,504   $ 554,930  
Preferred stock dividends   (367 )     (2,115 )   (2,344 )
Income from continuing operations
   available to common shareholders(A)
  691,916       580,389     552,586  
Preferred stock dividends–using
   “if converted” method
  367       2,115     2,344  
Additional ESOP contribution–using
   “ if converted” method
        (52 )   (502 )
Income from continuing operations
   available to common shareholders
   after assumed conversions(B)
 $ 692,283     $ 582,452   $ 554,428  
Average common shares outstanding(C)   251,429       252,011     254,497  
Dilutive stock equivalents from
   stock plans
  8,671       7,948     5,402  
Shares issuable upon conversion
   of preferred stock
  612       3,378     3,736  
Average common and common
   equivalent shares outstanding–
   assuming dilution(D)
  260,712       263,337     263,635  
Basic earnings per share–income
   from continuing operations
 $ 2.75     $ 2.30   $ 2.17  
   (A divided by C)                    
Diluted earnings per share–income
   from continuing operations
 $ 2.66     $ 2.21   $ 2.10  
   (B divided by D)                    


58


Notes to Consolidated Financial Statements  Becton, Dickinson and Company

 

15   Segment Data

The Company’s organizational structure is based upon its three principal business segments: BD Medical (“Medical”), BD Diagnostics (“Diagnostics”) and BD Biosciences (“Biosciences”).

    The major product lines in the Medical segment include needles, syringes and intravenous catheters, including safety-engineered devices, for medication delivery; insulin injection devices and blood glucose monitors for the treatment of diabetes; prefillable drug delivery devices provided to pharmaceutical companies and sold to end-users as drug/device combinations; surgical blades and regional anesthesia needles; critical care monitoring devices; ophthalmic surgery devices; sharps disposal containers; and home healthcare products. The major products and services in the Diagnostics segment are integrated systems for evacuated blood collection; an extensive line of safety-engineered specimen collection products and systems; plated media; automated blood culturing; molecular testing systems for sexually transmitted diseases; microorganism identification and drug susceptibility systems; and rapid manual testing products. The major product lines in the Biosciences segment include fluorescence activated cell sorters and analyzers; cell imaging systems; monoclonal antibodies and kits; reagent systems for life sciences research; tools to aid in drug discovery and growth of tissue and cells; and diagnostic assays.

    The Company evaluates performance of its business segments based upon operating income. Segment operating income represents revenues reduced by product costs and operating expenses.

    Distribution of products is primarily through distributors, as well as directly to hospitals, laboratories and other end users. Sales to a distributor which supplies the Company’s products to many end users accounted for approximately 11% of revenues in 2005, 2004 and 2003, respectively and included products from the Medical and Diagnostics segments. No other customer accounted for 10% or more of revenues in each of the three years presented.

Revenues   2005     2004   2003  
Medical     $ 2,958,088     $ 2,680,165   $ 2,456,876  
Diagnostics     1,657,064       1,531,639     1,373,651  
Biosciences     799,529       722,941     632,982  
Total(A)   $ 5,414,681     $ 4,934,745   $ 4,463,509  
                       
Segment Operating Income                      
Medical   $ 710,551     $ 566,582 (B)  $ 556,284  
Diagnostics     413,908       359,370     302,071  
Biosciences     175,339       155,888     100,597 (C)
Total Segment Operating Income     1,299,798       1,081,840     958,952  
Unallocated Expenses(D)     (294,944 )(E)      (328,972)
(F) 
  (236,994 )
Income From Continuing Operations                      
  Before Income Taxes   $ 1,004,854     $ 752,868   $ 721,958  
                       
Segment Assets                      
Medical   $ 2,656,320     $ 2,703,643   $ 2,738,082  
Diagnostics     1,245,769       1,217,620     1,128,878  
Biosciences     678,286       706,728     717,455 (C)
Total Segment Assets     4,580,375       4,627,991     4,584,415  
Corporate and All Other(G)     1,491,594       1,060,894     792,535  
Discontinued Operations           63,694     195,303  
Total   $ 6,071,969     $ 5,752,579   $ 5,572,253  
                       
Capital Expenditures                      
Medical   $ 184,525     $ 158,728   $ 167,168  
Diagnostics     99,742       79,782     61,590  
Biosciences     22,218       16,560     20,287  
Corporate and All Other     11,143       10,648     10,173  
Total   $ 317,628     $ 265,718   $ 259,218  
                       
Depreciation and Amortization                      
Medical   $ 202,825     $ 187,254   $ 174,711  
Diagnostics     102,882       97,731     86,882  
Biosciences     64,599       55,878     55,896  
Corporate and All Other     17,190       16,361     18,270  
Total   $ 387,496     $ 357,224   $ 335,759  
(A)    Intersegment revenues are not material.
   
(B)    Includes the $45,024 charge related to blood glucose monitoring products as discussed in Note 19.
   
(C)    Includes $26,717 in 2003 of impairment charges discussed in Note 3.
   
(D)    Includes interest, net; foreign exchange; corporate expenses; and certain legal defense costs.
   
(E)    Includes share-based compensation expense, as discussed further in Note 2.
   
(F)    Includes the litigation settlement of $100,000 as discussed in Note 16.
   
(G)    Includes cash and investments and corporate assets.


59


Notes to Consolidated Financial Statements  Becton, Dickinson and Company

 

Revenues by Organizational Units   2005     2004   2003  
BD Medical                      
   Medical Surgical Systems     $ 1,661,150     $ 1,540,723   $ 1,426,202  
   Diabetes Care     674,020       586,190     542,327  
   Pharmaceutical Systems     563,271       497,421     435,624  
   Ophthalmic Systems     59,647       55,831     52,723  
        $ 2,958,088     $ 2,680,165   $ 2,456,876  
BD Diagnostic                      
   Preanalytical