News Column

BECTON DICKINSON & CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 4, 2014

The following commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes. Within the tables presented throughout this discussion, certain columns may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts.

Company Overview

Becton, Dickinson and Company ("BD") is a global medical technology company engaged principally in the development, 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, pharmaceutical industry and the general public. Our business consists of three worldwide business segments - BD Medical ("Medical"), BD Diagnostics ("Diagnostics") and BD Biosciences ("Biosciences"). Our products are marketed in the United States and internationally through independent distribution channels and directly to end-users by BD and independent sales representatives.

BD's products are manufactured and sold worldwide. We organize our operations outside the United States as follows: Europe (which includes the Middle East and Africa); Greater Asia (which includes Japan and Asia Pacific); Latin America (which includes Mexico and Brazil) and Canada. We continue to pursue growth opportunities in emerging markets, which include the following geographic regions: Eastern Europe, the Middle East, Africa, Latin America and Asia Pacific (excluding Japan). We are particularly focused on certain countries whose economic and healthcare sectors are growing rapidly, in particular, China, India, Brazil and Turkey.

Overview of Financial Results and Financial Condition

Third quarter revenues of $2.2 billion represented an increase of 5.1% from the prior year's period and reflected volume increases of approximately 4.6% as well as favorable foreign currency translation of approximately 0.5%. Pricing had an immaterial impact on revenue growth in the quarter. Revenue growth in the current year's period was driven primarily by our Medical and Biosciences segments, as our Diagnostics segment's revenue growth was constrained by continued challenges in the United States. Medical segment growth was primarily driven by strong sales in the Medical Surgical Systems unit. Third quarter revenues in our Diagnostics segment reflected strong growth in the Preanalytical Systems unit which was partially offset by ongoing weakness in sales of the Women's Health and Cancer platform in the United States. Biosciences segment revenue growth was driven by solid instrument placements and a favorable comparison to the prior-year period, as discussed below. Third quarter revenues also reflected strong international safety and emerging markets sales as these areas continue to be key growth drivers for the Company. Third quarter sales in the United States of safety-engineered devices of $304 million grew 1.2% over the prior year's quarter. Third quarter international sales of safety-engineered devices of $265 million grew 11.6% over the prior year's period, including an estimated 0.8% unfavorable impact due to foreign currency translation. International safety-engineered device revenue growth was driven by good performance in Western Europe, Asia and Latin America.

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We continue to invest in research and development spending, geographic expansion, and new product promotions to drive further revenue and profit growth. Our ability to sustain our long-term growth will depend on a number of factors, including our ability to expand our core business (including geographical expansion), develop innovative new products, and continue to improve operating efficiency and organizational effectiveness. While the economic environment for the healthcare industry has stabilized, pricing pressures continue for some of our products. Healthcare utilization has continued to stabilize in the United States; however, any destabilization could adversely impact our U.S. businesses. Additionally, macroeconomic challenges in Europe continue to constrain healthcare utilization, although we currently view the environment as stable. In emerging markets, the Company's growth is dependent on government funding for healthcare systems.

In addition to the economic conditions in the United States and elsewhere, numerous other factors can affect our ability to achieve our goals including, without limitation, increased competition and healthcare reform initiatives. For example, the U.S. Patient Protection and Affordable Care Act contains certain tax provisions that affect BD. The most significant impact is the medical device excise tax that imposed a 2.3% tax on certain U.S. sales of medical devices. This tax became effective at the beginning of BD's second quarter of fiscal year 2013. As a result, this tax incrementally increases selling and administrative expense for the first nine months of fiscal year 2014 by $14 million.

Our financial position remains strong, with cash flows from operating activities totaling $1.207 billion in the first nine months of 2014. At June 30, 2014, we had $2.6 billion in cash and equivalents and short-term investments. Also, we continued to return value to our shareholders in the form of share repurchases and dividends. During the first nine months of 2014, we repurchased $400 million of our common stock and paid cash dividends of $316 million.

We face currency exposure each reporting period that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that fluctuate from the beginning of such period. We evaluate our results of operations on both an as reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. We calculate foreign currency-neutral percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our current-period reported results. From time to time, we may purchase forward contracts and options to partially protect against adverse foreign exchange rate movements. Gains or losses on our derivative instruments are largely offset by the gains or losses on the underlying hedged transactions. We do not enter into derivative instruments for trading or speculative purposes. For further discussion, refer to Note 11 in the Notes to Condensed Consolidated Financial Statements.

Comparisons of income from continuing operations between the third quarter of fiscal years 2014 and 2013 are affected by the following items that were reflected in our financial results:

• Our Medical segment results for the current year's quarter reflected a pre-tax charge of $9 million, or $0.03 diluted earnings per share from continuing operations, in Research and development, associated with the decision to terminate a research and development program. The charge relates to program asset write-offs and obligations. • Our third quarter fiscal year 2013 unallocated corporate results reflected a pre-tax charge of $22 million, or $0.07 diluted earnings per share from continuing operations, in Selling 23



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Comparisons of income from continuing operations between the nine-month periods of fiscal years 2014 and 2013 are affected by the items discussed immediately above as well as by the following items that were reflected in our financial results:

• Our Biosciences segment results reflected the second quarter fiscal year 2014 pre-tax charge of $20 million, or $0.06 diluted earnings per share from continuing operations, in Research and development, for asset write-offs primarily resulting from the discontinuance of an instrument product development program. The charge is largely attributable to capitalized product software, but also includes a lesser amount attributable to fixed assets. • Our Diagnostics segment results reflected the second quarter fiscal year 2014 pre-tax charge of $11 million, or $0.04 diluted earnings per share from continuing operations, in Selling and administrative, for contract termination costs that resulted from the early termination of a European distributor arrangement. • Our unallocated corporate results reflected the second quarter fiscal year 2014 pre-tax gain of $8 million, or $0.03 diluted earnings per share from continuing operations, in Other income, net resulting from the Company's receipt of cash proceeds from the sale of a company in which it held a small equity ownership interest. Results of Operations Revenues



Refer to Note 6 in the Notes to Condensed Consolidated Financial Statements for segment financial data.

Medical Segment

Third quarter revenues of $1.2 billion increased 5.3% over the prior year's quarter, which reflected an estimated favorable foreign currency translation impact of 0.6%.

The following is a summary of third quarter Medical revenues by organizational unit: Three months ended June 30, Estimated Foreign Total Exchange (millions of dollars) 2014 2013 Change Impact Medical Surgical Systems $ 590$ 561 5.1 % (0.9 )% Diabetes Care 258 250 3.5 % (0.1 )% Pharmaceutical Systems 353 330 6.9 % 3.5 % Total Revenues $ 1,201$ 1,140 5.3 % 0.6 %



Medical segment revenue growth was driven by strong emerging market and international safety sales particularly in the Medical Surgical Systems unit. The Diabetes Care unit's revenue

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growth reflected continued strong sales of pen needles, particularly the BD Ultra-Fine™ Nano product. This growth was partially offset by a delay in tender order timing as well as unfavorable comparison to the prior-year period due to a fluctuation in retailer ordering patterns that we experienced in the prior period. We expect this unit's revenue growth to normalize in the fourth quarter of fiscal year 2014. Revenue growth in the Pharmaceutical Systems unit in the current quarter was unfavorably impacted by the favorable timing of orders that occurred in the first half of fiscal year 2014. Global sales of safety-engineered products were $284 million, as compared with $268 million in the prior year's quarter, and included an estimated $1 million unfavorable impact due to foreign currency translation. Total Medical revenues for the nine-month period ended June 30, 2014 increased 6.1% from the prior-year nine-month period, including an estimated 0.3% unfavorable impact from foreign currency translation. For the nine-month period ended June 30, 2014, global sales of safety-engineered products were $832 million, compared with $776 million in the prior year's period, and included an estimated $8 million unfavorable impact due to foreign currency translation.

Medical operating income for the third quarter was $356 million, or 29.7% of Medical revenues, compared with $334 million, or 29.3% of segment revenues, in the prior year's quarter. Gross profit margin was higher in the current quarter than the third quarter of 2013 due to lower manufacturing costs resulting from continuous improvement projects, particularly Project ReLoCo, favorable pricing on certain product lines and lower pension costs. Gross profit margin in the current year's quarter also reflected the impact of a favorable product mix resulting from higher sales of products which have higher gross margins. These favorable impacts on gross profit margin were partially offset by higher start-up costs, higher raw material costs and costs to remediate a quality issue, including incremental investment in manufacturing processes, within the Pharmaceutical Systems unit. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Medical revenues in the third quarter of 2014 was lower as compared with the third quarter of 2013 primarily due to the favorable impact of higher sales growth in the current year's period. Research and development expenses for the quarter increased $9 million, or 21% above the prior year's period, reflecting the $9 million research and development program termination charge previously discussed. Segment operating income for the nine-month period was $968 million, or 28.6% of Medical revenues, compared with $913 million, or 28.7%, in the prior year's period.

Diagnostics Segment

Third quarter revenues of $679 million increased 3.7% compared with the prior year's quarter, which reflected an immaterial foreign currency translation impact.

The following is a summary of third quarter Diagnostics revenues by organizational unit: Three months ended June 30, Estimated Foreign Total Exchange (millions of dollars) 2014 2013 Change Impact Preanalytical Systems $ 364$ 345 5.6 % (0.3 )% Diagnostic Systems 315 310 1.6 % 0.2 % Total Revenues $ 679$ 655 3.7 % - 25



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Diagnostics segment revenues for the quarter reflected strong sales in the Preanalytical Systems unit. Global sales of safety-engineered products in the Preanalytical Systems unit totaled $285 million, compared with $270 million in the prior year's quarter, and included an estimated $1 million unfavorable impact due to foreign currency translation. Diagnostic Systems revenue growth in the quarter was unfavorably impacted by continued weaker sales of the Women's Health and Cancer platform due to guidelines providing for increased Pap smear testing intervals in the United States. Total Diagnostics revenues for the nine-month period ended June 30, 2014 increased by 2.0% from the prior-year nine-month period, including an estimated 1.0% unfavorable impact from foreign currency translation. For the nine-month period ended June 30, 2014, global sales of safety-engineered products in the Preanalytical Systems unit were $825 million, compared with $788 million in the prior year's period, and included an estimated $7 million unfavorable impact due to foreign currency translation.

Diagnostics operating income for the third quarter was $155 million, or 22.8% of Diagnostics revenues, compared with $159 million, or 24.2% of segment revenues, in the prior year's quarter. Gross profit margin was lower in the third quarter of fiscal year 2014 compared with the third quarter of 2013 primarily due to the impact of an unfavorable product mix resulting from lower sales of products which have higher gross margins as well as unfavorable foreign currency translation. These unfavorable impacts on gross profit margin were partially offset by lower start-up costs, lower pension costs and lower raw material costs. See further discussion on gross profit margin below. Selling and administrative expense as a percentage of Diagnostics revenues in the third quarter of 2014 was lower compared with the third quarter of 2013 reflecting lower pension costs and other various immaterial items. Research and development expenses in the third quarter of 2014 decreased by $2 million, or 4% compared with the prior year's period. Segment operating income for the nine-month period was $448 million, or 22.4% of Diagnostics revenues, compared with $473 million, or 24.1%, in the prior year's period.

Biosciences Segment

Third quarter revenues of $277 million increased 7.7% over the prior year's quarter, which reflected an estimated favorable foreign currency translation impact of 1.1%. Biosciences segment revenue growth was driven by solid instrument placements, new platforms and continued stability in the U.S. research spending environment. Segment revenue growth also reflected a favorable comparison to the prior-year period, as further discussed below. For the nine-month period ended June 30, 2014, total Biosciences revenues increased 7.1% from the prior-year nine-month period, including an estimated 0.5% unfavorable impact from foreign currency translation.

Biosciences operating income for the third quarter was $66 million, or 23.9% of Biosciences revenues, compared with $58 million, or 22.6% of segment revenues, in the prior year's quarter. Gross profit margin as a percent of Biosciences revenues was flat compared with the prior year's quarter primarily reflecting favorable foreign currency translation, offset by unfavorable pricing on certain product lines and other various immaterial items. See further discussion on gross profit margin below. Selling and administrative expense as a percent of Biosciences revenues in the third quarter of 2014 was lower compared with the third quarter of 2013 and reflected the favorable impact of higher sales growth in the current year's period and other various immaterial items. Research and development expenses in the third quarter of 2014 increased by $2 million, or 8% compared with the prior year's period, reflecting increased investment in new products and platforms. Segment operating income for the nine-month period was $205 million, or 23.9% of Biosciences revenues, compared with $195 million, or 24.3%, in the prior year's period.

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Geographic Revenues

Revenues in the United States for the third quarter of $871 million grew 2.8% compared to the prior year's period. U.S. revenue growth in our Medical segment was attributable to strong sales in the Pharmaceutical Systems unit and solid growth in the Medical Surgical Systems unit, partially offset by the unfavorable timing and prior-period comparison reflected in the Diabetes Care unit's revenues for the quarter, as previously discussed. U.S. Diagnostics growth was unfavorably impacted by the continued decline in Women's Health and Cancer platform sales, as previously discussed, as well as share losses. These unfavorable impacts to U.S. Diagnostics revenue growth in the quarter were partially offset by solid growth in the Preanalytical Systems unit. U.S. Biosciences revenues reflected solid instrument placements and growth in reagent revenues as well as a favorable comparison to the prior-year period, which was adversely impacted by unfavorable timing of Advanced Bioprocessing orders.

International revenues for the third quarter of $1.3 billion represented an increase of 6.7% over the prior year's quarter, including a 0.7% favorable impact due to foreign currency translation. International revenues for the third quarter of fiscal year 2014 reflected growth in all segments. Emerging market revenues for the third quarter of $530 million represented an increase of 4.9% over the prior year's quarter, including a 4.0% unfavorable impact due to foreign currency translation, and accounted for approximately 25% of our total revenues. International Medical and Diagnostics revenue growth was largely driven by emerging market growth as well as by strong sales of safety-engineered products. Biosciences international revenue growth reflected strong growth in Western Europe as well as a favorable comparison to the prior-year period, which was adversely impacted by weaker Western European sales due to austerity measures and the timing of government funding in Japan.

Gross Profit Margin

Gross profit margin was 51.5% for the third quarter, compared with 51.6% for the comparable prior-year period. Operating performance was unfavorably impacted by approximately 70 basis points primarily due to net unfavorable product mix resulting from lower sales of products which have higher gross margins. Operating performance was also unfavorably impacted by approximately 50 basis points due to higher start-up costs, higher raw material costs as well as costs to remediate a quality issue, including incremental investment in manufacturing processes, within the Pharmaceutical Systems unit. These unfavorable impacts on operating performance were partially offset by approximately 100 basis points due to lower manufacturing costs from continuous improvement projects and lower pension costs as well as an estimated 10 basis points relating to foreign currency translation.

Gross profit margin was 51.2% in the nine-month period of 2014, compared with 51.8% for the comparable prior-year period. The decrease in gross profit margin reflected an estimated unfavorable impact of 60 basis points relating to foreign currency translation. Operating performance was unfavorably impacted by approximately 60 basis points primarily due to net unfavorable product mix resulting from lower sales of products which have higher gross margins. Operating performance was also unfavorably impacted by approximately 30 basis points due to higher start-up costs and higher raw material costs. These unfavorable impacts on operating performance were substantially offset by approximately 90 basis points due to lower manufacturing costs from continuous improvement projects and lower pension costs.

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Selling and Administrative Expense

Selling and administrative expense was 24.5% of revenues for the third quarter, compared with 26.0% for the prior year's period. Aggregate expenses for the third quarter reflected an increase in core spending of approximately $18 million, including spending relating to the expansion of our business in emerging markets. Aggregate expenses for the third quarter of 2014 also reflected increased spending of $7 million related to our global enterprise resource planning initiative to update our business information systems as well as an increase in the deferred compensation liability of $5 million. This change in the deferred compensation liability is further discussed below. Selling and administrative expense in the current year's period was favorably impacted by lower pension costs of approximately $6 million, lower legal costs of approximately $7 million, favorable foreign currency translation of approximately $2 million and a favorable comparison to the prior-year period which included the $22 million litigation settlement charge previously discussed.

Selling and administrative expense was 25.4% of revenues for the nine-month period of fiscal year 2014, compared with 25.9% for the prior year's period. Aggregate expenses for the nine-month period of 2014 reflected an increase in core spending of approximately $68 million, including spending relating to the expansion of our business in emerging markets. Aggregate expenses for the nine-month period of 2014 also reflected the incremental first quarter fiscal year 2014 impact of $14 million related to the medical device excise tax and the $11 million early termination charge, as previously discussed. Aggregate expenses in the current year-to-date period additionally reflected an increase in the deferred compensation liability of $6 million and $3 million related to our global enterprise resource planning initiative to update our business information systems. Selling and administrative expense in the current year's period was favorably impacted by lower pension costs of approximately $17 million, favorable foreign currency translation of $14 million and lower legal costs of approximately $5 million. Aggregate expenses for the nine-month period of 2014 were also favorably impacted by a favorable comparison to the prior-year period, which included the $22 million litigation settlement charge, as well as a $6 million reversal of bad debt expense that was recorded in the second quarter of fiscal year 2014, as further discussed below.

Research and Development Expense

Research and development expense was $137 million, or 6.4% of revenues, for the third quarter, representing an increase of 13.5% compared with the prior year's amount of $121 million, or 5.9% of revenues. The increase in research and development expense for the third quarter compared with the prior year's third quarter primarily reflected the $9 million research and development program termination charge previously discussed. Research and development expense was $410 million, or 6.6% of revenues, for the nine-month period in the current year, representing an increase of 13.4% compared with the prior year's amount of $362 million, or 6.1% of revenues. Research and development expense for the nine-month period compared with the prior year's period reflected increased investment in new products and platforms within the Medical segment, in addition to the research and development program termination charge and the $20 million asset write-off primarily resulting from the discontinuance of an instrument product development program, as previously discussed.

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Non-Operating Expense and Income

Interest income was $12 million in the third quarter and $36 million in the nine-month period of 2014, compared with $6 million and $26 million, respectively, in the prior year's periods. The increases in the current year's periods compared with the prior year's periods primarily reflected the impact of higher investment gains on assets related to our deferred compensation plan and higher interest rates on investments outside the United States. The offsetting movements in the deferred compensation plan liability were recorded in selling and administrative expense. Interest expense was $33 million in the third quarter and $99 million in the nine-month period of 2014, compared with $35 million and $104 million, respectively, in the prior year's periods. These decreases were primarily due to lower levels of long-term fixed-rate debt and a reduction of interest payments through fixed-to-floating interest rate swap agreements. For further discussion regarding these swap arrangements, refer to Note 11 in the Notes to Condensed Consolidated Financial Statements.

Income Taxes

The income tax rate was 23.0% for the third quarters of fiscal years 2014 and 2013. During the third quarter of 2014, we made a decision to change our position of permanent reinvestment with respect to the unremitted earnings of Brazil and certain other Latin American jurisdictions. The impact of this change on the income tax rate was largely offset by the benefit of some discrete one-time items in the current quarter with respect to other non-U.S. operations. The current year's nine-month tax rate was 22.8% compared with the prior year's rate of 24.2%. The decrease in the income tax rate in the nine-month period of fiscal year 2014 was primarily attributable to geographic mix, the benefit of some discrete one-time items and a favorable comparison to the prior-year period which was unfavorably impacted by some discrete tax expenses.

Income from Continuing Operations and Diluted Earnings Per Share from Continuing Operations

Income from continuing operations and diluted earnings per share from continuing operations for the third quarter of 2014 were $326 million and $1.65, respectively. Income from continuing operations and diluted earnings per share from continuing operations for the prior year's third quarter were $292 million and $1.47, respectively. The current quarter's earnings reflected an estimated $0.02 favorable impact due to foreign currency translation. The research and development program termination charge previously discussed decreased income from continuing operations for the current year's quarter by $6 million, or $0.03 per share. The charge relating to the litigation settlement decreased income from continuing operations in the prior year's period by $14 million, or $0.07 diluted earnings per share.

For the nine-month periods, income from continuing operations and diluted earnings per share from continuing operations were $884 million and $4.47, respectively, in 2014 and $838 million and $4.21, respectively, in 2013. The current year-to-date period's earnings reflected an estimated $0.16 unfavorable impact due to foreign currency translation. Diluted earnings per share in the current and prior-year nine-month periods also reflected the third quarter impacts discussed above of $0.03 and $0.07, respectively. The incremental first quarter fiscal year 2014 impact of the medical device excise tax decreased income from continuing operations for the nine-month period of fiscal year 2014 by $9 million, or $0.05 diluted earnings per share. The after-tax asset write-off and contract termination charges previously discussed decreased income from continuing operations for the nine-month period ended June 30, 2014 by $12 million, or $0.06 per share, and $8 million, or $0.04 per share, respectively. The after-tax gain from the sale of an investment previously discussed increased income from continuing operations for the nine-month period ended June 30, 2014 by $5 million, or $0.03 per share.

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Liquidity and Capital Resources

Cash generated from operations, along with available cash and cash equivalents, is expected to be sufficient to fund our normal operating needs for the remainder of fiscal year 2014. Normal operating needs in fiscal year 2014 include working capital, capital expenditures, cash dividends and common stock repurchases. Net cash provided by continuing operating activities was $1.207 billion during the first nine months of 2014, compared with $989 million in the same period in 2013. The current period change in operating assets and liabilities was a net use of cash and primarily reflected higher levels of inventory, partially offset by lower levels of accounts receivable. The current period change in operating liabilities included the payment of $22 million into a fund under a settlement agreement related to indirect purchaser antitrust class action cases. Refer to Note 5 in the Notes to Condensed Consolidated Financial Statements for further discussion regarding this matter. The current period's decrease in accounts receivable reflects a $36 million payment of government receivables balances in Spain. This payment is further discussed below. Net cash provided by continuing operating activities in the third quarter of 2014 was reduced by changes in the pension obligation resulting primarily from discretionary cash contributions of $75 million. Net cash provided by continuing operating activities in the prior-year period was also reduced by changes in the pension obligation resulting primarily from discretionary cash contributions of approximately $138 million.

Net cash used for continuing investing activities for the first nine months of the current year was $730 million, compared with net cash provided by continuing investing activities of $296 million in the prior-year period. Cash outflows relating to acquisitions were $40 million in the first nine months of the current year as a result of the Company's acquisition of Alverix in the second quarter of fiscal year 2014. Cash outflows relating to acquisitions of $136 million in the prior year's period related to the Company's acquisitions of Safety Syringes and Cato in the first and second quarters of fiscal year 2013, respectively. The prior period's net cash provided by continuing investing activities included approximately $736 million of net proceeds from the sale of the Discovery Labware disposal group. Capital expenditures were $339 million in the first nine months of 2014 and 2013.

Net cash used for financing activities for the first nine months of the current year was $701 million, compared with $830 million in the prior-year period. For the first nine months of the current year, we repurchased approximately 3.6 million shares of our common stock for $400 million, compared with approximately 5 million shares of our common stock for $406 million in the prior-year period. Aggregate common stock repurchases are estimated to be approximately $450 million for the full fiscal year 2014, subject to market conditions. At June 30, 2014, a total of approximately 9.1 million common shares remained available for purchase under the Board of Directors' September 2013 repurchase authorization.

At June 30, 2014, total worldwide cash and short-term investments were approximately $2.6 billion, of which $2.4 billion was held in jurisdictions outside of the United States. We regularly review the amount of cash and short-term investments held outside the United States and currently intend to use most of such amounts to fund our international operations and their growth initiatives. However, if these amounts were moved out of these jurisdictions or repatriated to the United States, there could be adverse tax consequences. As discussed above, for Brazil and certain other Latin American jurisdictions, a decision was made in the third quarter of fiscal year 2014 to change our position of permanent reinvestment as it relates to their unremitted earnings. As of June 30, 2014, we have not repatriated any of these earnings.

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As of June 30, 2014, total debt of $4.0 billion represented 41.6% of total capital (shareholders' equity, net non-current deferred income tax liabilities, and debt), versus 43.1% at September 30, 2013. Short-term debt represented 5.2% of total debt at June 30, 2014 and September 30, 2013.

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 June 30, 2014. We have available a $1 billion syndicated credit facility. This credit facility, under which there were no borrowings outstanding at June 30, 2014, provides backup support for our commercial paper program and can also be used for other general corporate purposes. It includes a provision that enables BD, subject to additional commitments made by the lenders, to access up to an additional $500 million in financing through the facility, for a maximum aggregate commitment of $1.5 billion. During the third quarter of fiscal year 2014, we extended the expiration date of this credit facility to May 2018 from the original expiration date of May 2017. The credit facility includes a single financial covenant that requires BD to maintain an interest expense coverage ratio (ratio of earnings before income taxes, depreciation and amortization to interest expense) of not less than 5-to-1 for the most recent four consecutive fiscal quarters. On the last eight measurement dates, this ratio has ranged from 11-to-1 to 16-to-1. In addition, we have informal lines of credit outside the United States.

Government Receivables

Accounts receivable balances include sales to government-owned or government-supported healthcare facilities in several countries, which are subject to payment delays. Payment may be dependent upon the financial stability and creditworthiness of those countries' national economies. In recent years, due to economic conditions in parts of Western Europe, particularly in Italy and Spain, the average length of time it takes us to collect our accounts receivable in certain regions within these countries has increased. Outstanding governmental receivable balances, net of reserves, in Italy at June 30, 2014 and September 30, 2013 were $61 million and $73 million, respectively. Outstanding governmental receivable balances, net of reserves, in Spain were $42 million and $61 million at June 30, 2014 and September 30, 2013, respectively. During the second quarter of fiscal year 2014, we received a $36 million payment from the Spanish government, and as a result, we reversed $6 million of bad debt expense that was previously recorded to reserve for uncollected outstanding government receivable balances in Spain.

We continually evaluate all governmental receivables for potential collection risks associated with the availability of government funding and reimbursement practices. We believe the current reserves related to all governmental receivables are adequate and that this concentration of credit risk will not have a material adverse impact on our financial position or liquidity.

Cautionary Statement Regarding Forward-Looking Statements

BD and its representatives may from time to time make certain forward-looking statements in publicly released materials, both written and oral, including statements contained in filings with the Securities and Exchange Commission, press releases, and our reports to shareholders. Forward-looking statements may be identified by the use of words such as "plan," "expect,"

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"believe," "intend," "will," "anticipate," "estimate" and other words of similar meaning in conjunction with, among other things, discussions of future operations and financial performance, as well as our strategy for growth, product development, regulatory approvals, market position and expenditures. All statements that address operating performance or events or developments that we expect or anticipate will occur in the future - including statements relating to volume growth, sales and earnings per share growth, cash flows or uses, and statements expressing views about future operating results - are forward-looking statements.

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

The following are some important factors that could cause our actual results to differ from our expectations in any forward-looking statements. For further discussion of certain of these factors, see Item 1A. Risk Factors in our 2013 Annual Report on Form 10-K.

• Weakness in the global economy and financial markets, and the potential adverse effect on the cost of operating our business, the demand for our products and services, prices for our products and services due to increases in pricing pressure, or our ability to produce our products, including the impact on developing countries. • Deficit reduction efforts or other adverse changes in the availability of government funding for healthcare and research, particularly in the United States and Europe, that could further weaken demand for our products and result in additional pricing pressures, as well as create potential collection risks associated with such sales, and any future U.S. federal government shutdown. • The consequences of the Patient Protection and Affordable Care Act in the United States, which implemented an excise tax on U.S. sales of certain medical devices, and which could result in reduced demand for our products, increased pricing pressures or otherwise adversely affect BD's business. • Future healthcare reform in the countries in which we do business may also involve changes in government pricing and reimbursement policies or other cost containment reforms. • Changes in domestic and foreign healthcare industry practices that result in a reduction in procedures using our products or increased pricing pressures, including the continued consolidation among healthcare providers and trends toward managed care and healthcare cost containment. 32



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Table of Contents • Changes in reimbursement practices of third-party payers. • Our ability to penetrate developing and emerging markets, which depends on local 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. Our international operations also increase our compliance risks under the Foreign Corrupt Practices Act and other anti-corruption laws. • Political conditions in international markets, including civil unrest, terrorist activity, governmental changes, restrictions on the ability to transfer capital across borders and expropriation of assets by a government. • Security breaches of our computer and communications systems, including computer viruses, "hacking" and "cyber-attacks," which could impair our ability to conduct business, or result in the loss of BD trade secrets or otherwise compromise sensitive information of BD or its customers, suppliers and other business partners. • Fluctuations in the cost and availability of oil-based resins and other raw materials, as well as certain sub-assemblies and finished goods, 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 items. • Regional, national and foreign economic factors, including inflation, deflation, fluctuations in interest rates and, in particular, foreign currency exchange rates, and the potential effect on our revenues, expenses, margins and credit ratings. • New or changing laws and regulations affecting our domestic and foreign operations, or changes in enforcement practices, including laws relating to trade, monetary and fiscal policies, taxation (including tax reforms that could adversely impact multinational corporations), sales practices, environmental protection, price controls and licensing and regulatory requirements for new products and products in the postmarketing phase. In particular, the U.S. and other countries may impose new requirements regarding registration, labeling or prohibited materials that may require us to re-register products already on the market or otherwise impact our ability to market our products. Environmental laws, particularly with respect to the emission of greenhouse gases, are also becoming more stringent throughout the world, which may increase our costs of operations or necessitate changes in our manufacturing plants or processes or those of our suppliers, or result in liability to BD. • Product efficacy or safety concerns regarding our products resulting in product recalls, regulatory action on the part of the U.S. Food and Drug Administration (FDA) or foreign counterparts, declining sales and product liability claims, particularly in light of the current regulatory environment, including increased enforcement activity by the FDA. 33



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Table of Contents • Competitive factors that could adversely affect our operations, including new product introductions (for example, new forms of drug delivery) by our current or future competitors, increased pricing pressure due to the impact of low-cost manufacturers as certain competitors have established manufacturing sites or have contracted with suppliers in low-cost manufacturing locations as a means to lower their costs, patents attained by competitors (particularly as patents on our products expire), and new entrants into our markets. • The effects of events that adversely impact our ability to manufacture our products (particularly where production of a product line is concentrated in one or more plants) or our ability to source materials or components from suppliers (including sole-source suppliers) that are needed for such manufacturing, including pandemics, natural disasters, or environmental factors. • 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, obtain intellectual property protection for our products, obtain coverage and adequate reimbursement for new products, or gain and maintain market approval of products, as well as the possibility of infringement claims by competitors with respect to patents or other intellectual property rights, all of which can preclude or delay commercialization of a product. Delays in obtaining necessary approvals or clearances from the FDA or other regulatory agencies or changes in the regulatory process may also delay product launches and increase development costs. • Fluctuations in the demand for products we sell to pharmaceutical companies that are used to manufacture, or are sold with, the products of such companies, as a result of funding constraints, consolidation or otherwise. • Fluctuations in university or U.S. and international governmental funding and policies for life sciences research. • Our ability to achieve our projected level or mix of product sales, as our earnings forecasts are based on projected volumes and sales of many product types, some of which are more profitable than others. • Our ability to implement our ongoing upgrade of our enterprise resource planning system, as any delays or deficiencies in the design and implementation of our upgrade could adversely affect our business. • Pending and potential future litigation or other proceedings adverse to BD, including antitrust claims, product liability claims, environmental claims and patent infringement claims, and the availability or collectability of insurance relating to any such claims. • The effect of adverse media exposure or other publicity regarding BD's business or operations, including the effect on BD's reputation or demand for its products. 34



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Table of Contents • The effects, if any, of governmental and media activities regarding the business practices of group purchasing organizations, which negotiate product prices on behalf of their member hospitals with BD and other suppliers. • The effect of market fluctuations on the value of assets in BD's pension plans and on actuarial interest rate and asset return assumptions, which could require BD to make additional contributions to the plans or increase our pension plan expense. • The impact of business combinations, including any volatility in earnings relating to acquired in-process research and development assets, and our ability to successfully integrate any business we may acquire. • Our ability to obtain the anticipated benefits of restructuring programs, if any, that we may undertake. • Issuance of new or revised accounting standards by the Financial Accounting Standards Board or the Securities and Exchange Commission.



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.

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