Becton, Dickinson and Company (BDX) Q3 2012 Earnings Report, Transcript and Summary

Hello, and welcome to BD's Third Fiscal Quarter 2012 Earnings Call. At the request of BD, today's call is being recorded. It will be available for replay through August 9, 2012, on the Investors page of the bd.com website or by phone at (800) 585-8367 for domestic calls and (404) 537-3406 for international calls, using conference ID 96886040. [Operator Instructions] Beginning today's call is Ms. Monique Dolecki. Ms. Dolecki, you may begin.

Thank you, Jackie. Good morning, everyone, and thank you for joining us to review our third fiscal quarter results. As we referenced in our press release, we are presenting a set of slides to accompany our remarks on this call. The presentation is posted on the Investor Relations page of our website at bd.com. During today's call, we will make forward-looking statements, and it is possible that actual results could differ from our expectations. Factors that could cause such differences appear in our third fiscal quarter press release and in the MD&A sections of our recent SEC filings. We will also discuss some non-GAAP financial measures with respect to our performance. A reconciliation to GAAP measures can be found in our press release and its related financial schedules and in the slides. A copy of the release, including the financial schedules, is posted on the bd.com website. Leading the call this morning is Vince Forlenza, Chairman, Chief Executive Officer and President. Also joining us are David Elkins, Executive Vice President and Chief Financial Officer; Bill Kozy, Executive Vice President; and Tom Polen, President of Diagnostics Systems. It is now my pleasure to turn the call over to Vince.

Thank you, Monique, and good morning, everyone. As we stated in our press release, we were pleased with our third quarter results, which were in line with our expectations. Growth was driven by our BD Medical and BD Diagnostics segments, and we continue to experience strong growth in international safety and emerging markets. We believe that our revenue and earnings growth this quarter demonstrate that our strategy implementation is on track. We're seeing improved performance in the back half of the fiscal year, as we expected and outlined for you earlier this year. We continue to face challenges in our Biosciences business in the U.S., which was in line with our expectations. The Biosciences business continues to be impacted by an uncertain research spending environment and lack of overall demand for instruments and research re-agents. In other areas of our business, we see utilization in the U.S. as stable but constrained, with some uncertainty in Europe due to continued macroeconomic challenges. Overall, we believe that our results this quarter continue to highlight the benefits of our diversified portfolio, with softness in 1 segment being offset by strength in our other 2 segments. We also continue to see a positive impact from our new product launches in addition to growth from the Accuri, Carmel and KIESTRA acquisitions. We recently announced our plans to acquire Safety Syringes, Inc., SSI, a privately held company that specializes in the development of passive anti-needlestick devices for prefillable syringes. This transaction is subject to regulatory review and is expected to close by the end of the fiscal year. This acquisition will nicely complement our Pharmaceutical Systems unit and our safety-engineered products, and it is well aligned with BD's strategy of applying technology in clinical knowledge to make healthcare more effective, efficient and safe. We believe that BD's expertise, in conjunction with Safety Syringes' portfolio, will enable innovative safety technology development and will bring forth the next generation of safety-engineered prefillable syringes. SSI's latest annual sales were about $30 million, with a compound annual growth rate of about 10% over the past 3 years. Once the acquisition is complete, revenues will be accounted for under our Pharmaceutical Systems unit. Based on our results year-to-date, we are now guiding currency-neutral revenue growth to be about 4%, the higher end of our previously communicated range. We are reaffirming our currency-neutral EPS growth of 4% to 5% even as we continue to invest in new products and absorb costs from our recent acquisitions. On Slide 5, we've outlined our third quarter revenue and EPS results, which I will speak to on a currency-neutral basis. The results of our Discovery Labware business, excluding Advanced Bioprocessing, have been reclassified to discontinued operations. David will go through this later in his remarks. Total company revenues were solid, increasing by 4.9%. Fully diluted EPS came in at $1.52, [indiscernible] and 9.7% over the [indiscernible]. For the 9 months year-to-date results, revenue growth was 4.1%; EPS of $3.95 increased by 1%. Now I'd like to turn things over to David for a more detailed discussion of our third quarter financial performance.

Thank you, Vince, and good morning, everyone. I'd like to begin by discussing the key financial highlights for the third quarter. As Vince stated, our third quarter results were in line with our expectations. We continue to proceed with the sale of our Discovery Labware unit. Its results have been reclassified as discontinued operations. I will provide some more detail around this on the next slide. As we outlined for you on our last earnings call, we saw sequential improvements in our gross profit and operating margins as we move past the difficult comparisons we faced in the first half of the year. As Vince mentioned, we are raising the bottom end of the total year currency-neutral revenue growth guidance to about 4%. We are reaffirming our currency-neutral EPS growth guidance of 4% to 5% even as we increase investments in new products and absorbed the costs from our recent acquisitions. On a reported basis, we expect EPS to be in the -- between $5.33 and $5.38 for the total year. This reflects the reclassification of Discovery Labware unit and the anticipated effects of unfavorable currency translation. Our updated guidance range assumes a euro exchange rate of $1.23 in the fourth quarter, as well as further strengthening of the U.S. dollar versus the Brazilian real and Indian rupee. Additionally, during the third quarter, we completed about $250 million in share repurchases. Year-to-date, we've completed approximately $1.25 billion of our estimated $1.5 billion share repurchase program. On Slide 8, I'll walk you through our third quarter revenue and EPS results that highlight the impact of the pending Discovery Labware divestiture. Including Discovery Labware, revenues increased 4.8%, and fully diluted EPS came in at $1.59 per share. This was an increase of 9.3% over the prior period. Revenue growth from continuing operations, excluding Discovery Labware, was 4.9% for the third quarter. EPS of $1.52 increased by 9.7%. Excluding the results of Discovery Labware, our revenue and EPS growth improved during the quarter. Now let's move to Slide 9, where we review our revenue growth by segment, which I'll speak to on a currency-neutral basis. As I just mentioned, revenue growth was 4.9% for the total company on a continuing operations basis. Pricing erosion in the quarter was about 70 basis points. This is in line with our expectations as we move past the difficult comparisons in the first half of the year. BD Medical third quarter revenues increased 6.4%. This segment's growths was driven by positive results across all 3 units. Diabetes Care growth of 9% was driven by continued strong sales of pen needles and a favorable comparison over the prior year. The favorable comparison in this unit contributed about 2 percentage points of growth. We had a solid quarter in our Medical Surgical Systems unit, with strong performance coming from our BD PhaSeal product and international sales of safety-engineered products. Pharmaceutical Systems growth was 8.9%, aided by some favorable timing of orders. The favorable timing of orders contributed about 4 percentage points of growth. The aforementioned items contributed about 1.4 percentage points to BD's Medical revenue growth. For the 9-month year-to-date results, the Medical segment grew 4.8%. BD Diagnostics third quarter revenues increased 4.7%. Growth in this segment was driven by Preanalytical Systems, which benefited from solid sales in safety-engineered products and continued strength in our Women's Health and Cancer. For the first 9 months, BD Diagnostics grew 4.3%. BD Biosciences revenue came in at 0.2%, with solid international growth being offset by declines in our U.S. business. For the 9-month year-to-date results, our Biosciences segment grew 1.3%. Moving to Slide 10. I'll walk you through our geographic revenues for the third quarter. As Vince stated, we see the environment in the U.S. as stable but constrained. Overall, BD's reported U.S. revenues were up 1.1% versus prior year. Growth in our Medical segment was about 3%. This was driven by strong growth in our Pharmaceutical Systems and Diabetes Care and partially offset by difficult pricing comparisons in our Medical Surgical Systems unit. This is in line with our expectations and similar to the results that we discussed last quarter. Growth in our Diagnostics segment was 0.8%, driven by solid sales of Preanalytical Systems, which grew about 2%. Diagnostics Systems unit declined about 0.5%, partially due to a tough environment in our Microbiology business and softness in our GeneOhm HAI platform. Our new HAI platform, BD MAX, is approved for MRSA by the FDA in early July, and we expect our sales trajectory to improve as we continue to build out the platform on this menu. Biosciences sales in the U.S. for the third fiscal quarter declined 6.4%. We continue to see weakness in the U.S. research market, as well as a tougher competitive environment in research re-agent sales. We believe there will continue to be uncertainty in the U.S. research market until after the elections in November. Also, we continue to experience lower demand for high-end instruments in Cell Analysis due to continued funding constraints in the pharmaceutical and biotech research area, as well as the academic markets. International revenue grew 7.8% currency-neutral in the quarter, with growth coming from all 3 segments. The Medical and Diagnostics segments both grew 8.5%. Revenue growth in these segments was primarily driven by strong sales of safety products and continued growth in the emerging markets. Biosciences grew at 3.8% in the quarter. Growth in this segment was negatively impacted by a tough comparison to the prior year period, as customers were pushed for the second quarter -- customers' orders were pushed from the second quarter to the third quarter of fiscal year 2011 due to Japan's tsunami. This difficult comparison negatively impacted Biosciences' growth by about 2.4%. We continue to see positive results in the Biosciences segment outside the United States. For the 9-month year-to-date results, reported U.S. revenues grew about 1%, the Medical segment increasing 3%, Diagnostics growing about 1%, and Biosciences declining 9%. Total international revenue growth was a strong 6% currency-neutral, with Medical growing 5.8%, Diagnostics about 7%, and Biosciences growing 6.6%. Moving to total safety on Slide 11, which includes the PhaSeal acquisition. Currency-neutral sales increased 7.4% to about $500 million in the quarter. International sales were up 15.7% on a currency-neutral basis, with Western Europe and emerging markets both growing double digits. Medical Safety sales grew almost 10%, driven by Infusion Therapy products and a PhaSeal product. Diagnostics Safety sales increased about 5%, driven by a range of safety-engineered products. For the 9-month year-to-date results, Safety growth was almost 9% on a currency-neutral basis. This was due to a combination of strong international growth of 16.7% and a growth rate of 3.6% in the U.S. On Slide 12, we review our revenue growth in the third quarter. Our reported growth rate was 1.5%. Performance contributed 4.9% to growth, off by 3.4% of unfavorable currency translation. Acquisitions contributed about 80 basis points of growth in the quarter. Moving on to Slide 13 and looking at our gross margin, we experienced about a 50-basis-point decline, which was in line with our expectations. Operating performance was impacted by the negative effects of pricing, software amortization in our Biosciences business and product mix. Favorable currency translation contributed about 20 basis points. From the beginning of the fiscal year, gross profit has improved 130 basis points. Slide 14 recaps the third quarter income statement and highlights our foreign currency-neutral results. As discussed earlier, third quarter revenue grew about 5%. Our gross margin of 52.2% improved sequentially as we move past the difficult comparisons that impacted our results in the first half of the year. Moving down the income statement line, SSG&A increased 3.2%, primarily due to increased investments in emerging markets, our EVEREST SAP implementation and expenses related to our Carmel, KIESTRA and Accuri acquisitions. Excluding the costs from these incremental investments, our year-over-year SG&A costs would have declined. This highlights our continued cost discipline management. R&D increased about 2%, which is in line with our expectations, due to continued investment in our new product portfolio. Our operating income increased 4% as we start experiencing positive sequential improvements in our gross profit and more normalized levels of SSG&A spend. Since the first quarter of the fiscal year, our operating income margin has improved 430 basis points. Now I'd like to turn to Slide 15, which review our changes in guidance from May, which includes the Discovery Labware unit, and our updated outlook, which excludes the Discovery Labware unit. As you can see, we've increased our revenue guidance to about 4%, which is at the higher end of our previously communicated range. We now expect EPS to be between $5.33 and $5.38. This reduction reflects about $0.29 from the pending sale of Discovery Labware, and about [indiscernible] from unfavorable currency translation. On a [indiscernible] we are reaffirming our previous guidance of 4% to 5% despite the increased costs from our recent acquisitions. Gross profit margin remains in line with our previously communicated range of 51.3% to 51.5%. Our SSG&A expenses increased about 40 basis points. This is due to the divestment of our Discovery Labware, and some allocated overhead costs remain in continuing operations. For the total year, we expect SSG&A growth to be about 7%, in line with our original expectations. R&D spending remains in line at about 6% of sales. Our operating income range of 20.4% to 20.6% now reflects about 50 basis points from divestment of Discovery Labware, as the aforementioned SSG&A overhead costs remain within continuing operations. We expect tax rate improvement due to the Discovery Labware divestiture. This was predominately a U.S.-based business. We now expect our tax rate to be between 24.8% and 25%. Our cash flow remains strong, and we expect about $1.6 billion in operating cash flow for the fiscal year. This reflects the divestment of Discovery Labware and the operating cash associated with that unit. Including Discovery Labware, our cash projection is in line with our original guidance of $1.7 billion. As a reminder, about 80% of our cash balance is outside the U.S. at the end of the fiscal quarter. Now I'd like to turn the call back over to Vince, who will walk you through our results in emerging markets and also provide you with an update on the product portfolio.

Thanks, David. Moving on to Slide 17, I would like to highlight our emerging market results. We continue to see strong growth in emerging markets, which accounted for approximately 22.8% of our total revenues in the third quarter. Emerging market revenues grew at 10.6%. We continue to see double-digit growth in a number of key markets, with China growing at 19.7% in the quarter, which is in line with our expectations. We are very pleased with Safety revenue growth in emerging markets, which was up about 18% over the prior year. We are encouraged by the positive results in Europe, as the market continues to convert to safety-engineered products. We have many exciting opportunities in our pipeline. I'd like to review our key products that have launched year-to-date. In our Medical segment, we launched the BD PentaPoint 5-bevel pen needle. This is the first and only pen needle with a patented 5-bevel needle tip, which is clinically demonstrated to improve injection comfort in patients when compared with the current 3-bevel pen needles. In our Diagnostics segment, we launched the BD MAX MRSA assay in the U.S. in early June. The MRSA assay is an easy-to-use cost-effective method to identify patients with this deadly superbug, and we believe it will support better outcomes for patients and a safer hospital environment. This is the second test cleared this year by the FDA on the BD MAX System. This milestone represents further confirmation of BD's commitment to rapidly expand our menu, enabling laboratories to offer a broad range of molecular tests that meet both their current and future clinical needs. In our Biosciences segment, we launched the 6-color BD FACSJazz Cell Sorting System, which incorporates customer input from a 2011 global early access program. As a result, we made refinements to enhance the usability and ease of use. This system has many innovative features that simplify sorting, such as digital controls and factory-optimized settings for the precise isolation of cells. Moving on to Slide 19. In the Diagnostics segment, the U.S. launch of C. difficile on BD MAX remains on track for the first quarter of fiscal year 2013. Our BD Viper molecular platforms remains positioned to a best-in-class lab efficiency and performance for high-volume screening assays. In the fourth quarter of fiscal year 2012, we plan to launch the Trichomonas assay on this platform in the EU. The Trichomonas launch in the U.S. is expected in the back half of fiscal year 2013. Our launch of the bench-top BD Viper LT and GC/CT assay remains on track for fiscal year 2013 globally, followed by the launch of our HPV genotyping assay on Viper LT x U.S. Along with the launch of the Viper LT, our front-end automation system for Women's Health is expected in the beginning of fiscal year 2013 in the EU and later in the year in the U.S., which will be marketed globally under the brand name Totalys. This launch is delayed by 1 quarter. I'd like to spend a few minutes discussing our SurePath Plus R&D program, which we have decided to stop. We recently completed the analysis of the midpoint clinical trial data, which included samples for more than 3,500 patients. The data showed that SurePath Plus delivered a significant increase in sensitivity as compared to traditional liquid-based cytology test. However, we also saw a slight decrease in specificity, which was not within our expectations. Based on a thorough review of our portfolio strategy and analysis of the midpoint clinical trial data, we have subsequently made the decision to stop the SurePath Plus R&D program. Our overall Women's Health cervical cancer strategy remains very much intact, and we do not see the decision regarding SurePath Plus changing the strategic direction of that business. Our SurePath cytology platforms continue to be recognized as a leading product for cervical cancer detection. When combined with our FocalPoint automated imaging system, we can provide customers with the advantage of over 20% higher cancer detection as compared to manually read cytology slides and the only automated imaging system capable of testing conventional and liquid-based cytology samples. Over the next year, we plan to launch a series of new products, which leverage our expertise in cytology and molecular diagnostics. This includes the 2013 launch of our previously mentioned Totalys automation system, which will automate sample processing from our SurePath sample vials and manage chain of custody across our suite of molecular and cytology systems. This will complement our upcoming launch of the Viper LT and our fully automated HPV genotyping assay. Now moving on to Biosciences. As we have mentioned in previous earnings calls, we have 2 new CD4 analyzers launching in the near term. In fiscal year 2014, we plan to launch a CD4 analyzer that is designed for mid- and smaller-volume laboratories in both emerging markets and the developing world. This is delayed from our original launch expectations. The other CD4 analyzer is a more portable point-of-care instrument targeted towards rural clinics in the developing world. We expect to launch it in fiscal year 2014. Now we'll continue to provide you with updates on our products and programs as we continue to make progress on them. Moving to Slide 20. Before we open the call to questions, I would like to reiterate the key messages from our discussion today. We're pleased with our third quarter results and year-to-date results. We saw solid growth on the top line despite the headwinds we faced in our Biosciences business in the U.S. and the challenging macroeconomic climate. We continue to see good organic growth in addition to growth coming from our recent acquisitions. As we expected and outlined for you earlier in the year, we have now moved past the tough comparisons that occurred in fiscal year 2011, which impacted our results in the first half of the year. As we move past those tough comparisons, we saw a nice improvement in our profitability as we continue to execute against our efficiency programs. And we continue to be encouraged by our performance in emerging markets and international safety sales. Our pipeline remains largely intact with our expectations. And while we are disappointed by the discontinuation of the SurePath Plus R&D program, we believe that our Women's Health and Cancer strategy remains very much intact. We believe our results year-to-date highlight the benefits of a diversified portfolio given the challenging macro economic backdrop. We are committed to delivering on our current neutral -- currency-neutral guidance of about 4% on the top line and 4% to 5% on the bottom line. Lastly, we will continue to execute against our strategy of investing and innovating for growth, and we continue to develop value to our shareholders and customers globally. Thank you. We will now open the call to questions.

[Operator Instructions] Our first question is coming from the line of Amit Bhalla with Citigroup.

A question for David just initially. Can you give us an update on your thoughts on the cash from Discovery Labware and how you plan to redeploy it? And can you also give us some initial thoughts on the fiscal '13 outlook, specifically underlying revenue growth and margin expansion, given some of the headwinds such as the device tax?

Yes, just a couple of things. One, on Discovery Labware, as we've been guiding, next year we're going to do share repurchases between $400 million and $600 million, and that contemplates the sale of Discovery Labware. As we said previously, the net proceeds of that are about $500 million. As you start thinking about fiscal year '13, Amit, it's just a couple of things. One is if you think about some of the headwinds that we'll have, we have the device tax that comes in next year. We said that's about $55 million. Currency, we're anticipating the headwind from where we are this year. This year, we'll probably average, versus the euro, about $1.30, and we have strengthening costs; other currencies as well, as you know, Indian rupee, as well as the Brazilian real, so we anticipate that, that will continue as we go into next year. And then next year, we have the implementation of our SAP EVEREST in North America, which next year is going to be at peak. As far as the tailwinds, and we'll update you on this in November when we provide guidance, but our recent acquisitions are going to become neutral to EPS as we get into next year, and that should be accretive on an EPS basis overall. Also, if you recall our ReLoCo program, we got about $50 million to $60 million next year coming through on that. In ReLoCo II, we'll start to see some benefits on that as we get into fiscal year '13. And we'll also see the benefits of some of these new product launches. We expect the launch of about 10 new products by the end of fiscal year '12. So we've got some good tailwinds. I don't know if there's anything else Vince wants to add.

Well, just to clarify on the acquisition, since David said they're becoming neutral to EPS. But on a cash basis, they're accretive to EPS in 2013.

And just a quick follow-up on the Diagnostics business. I was hoping Tom Polen could just elaborate on STD, GeneOhm and TriPath's performance in the quarter.

Sure.

This is Tom Polen. Just [indiscernible] that question. So to start with TriPath. TriPath in the quarter, we grew just over 8%, and that's consistent with the trends that we've seen in the past, where the U.S. is relatively flat, driven by flat Pap volumes overall. And x U.S., we continue to see solid double-digit growth as we're upgrading customers from conventional Pap to our liquid-based cytology and as developing countries continue to expand access to the cervical cancer screening. We switch over to GenOhm and STD. GenOhm, we saw a 0.9% decline in the quarter, driven, as David mentioned earlier, by continued MRSA competitiveness and pricing pressure. C. diff, we are continuing to see strong double-digit growth but off of a smaller base than MRSA for now. Of course, we have recently received FDA approval of MRSA on MAX, and we are focused on driving new MAX placements to accelerate our growth in that HAI space. And we expect that's going to take a few quarters for you to see that ramp. But we're getting very, very positive customer feedback as we're launching that at this time. On the high-volume STD-screening business, we saw flat performance this quarter, primarily impacted by a difficult comparison to last year, which is when we launched our new XTR chemistry on the Viper platform, and we had most of our very large customers pull in stock last quarter as part of converting up to that XTR chemistry. If you look at a full year basis on our STD business, it's up about 3.5% year-to-date through Q3. With a few points higher than 3.4% volume, that's being partially offset from pricing pressures that I think we see across the board in that high-volume screening market.

Your next question comes from the line of Jon Wood with Jefferies. Jon Davis Wood - Jefferies & Company, Inc., Research Division: So Vince, would love to hear, after you guys have ramped up this corporate development group under Bill Rhodes for a couple of quarters, where is that program in terms of putting in place a more standardized process for evaluating and executing deals? And I'd love to hear where you view the current pipeline in terms of number of opportunities, size of opportunities, as we kind of move into fiscal '13.

Sure. I think actually we're making very good progress on standardizing our evaluation process. We always had a pretty good standardized evaluation process. But also, now the -- as we do these deals, the due diligence process and the integration process, I think that's probably the area we're making most progress on. And as David mentioned in his remarks, we're starting to see some good progress on those recent acquisitions that we've done. In terms of the size of the deal, we're still focused on plug-in acquisitions, so we really don't have any change going on there. But working with the businesses, it's not that we've added a large number of people to corporate development. It's a couple of piece -- people that are working on these standardized processes and working directly with the businesses and it's all business units to identify the acquisitions. The other thing that we've done is just extended that capability internationally. And as you've seen in the last couple of deals that we've done and have international deals. So that's kind of the overview of where we're at, and we have -- and we continue to have a good pipeline to evaluate. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Okay. Great. My follow-up for David. Is it possible at this point to call out the ERP impact kind of incrementally in '13 versus '12? You probably have some expenses going away and depreciation coming in, so I'd love to hear if you've got kind of a rolled-up view on that ERP impact next year.

What we have said is we're spending about $100 million this year on the ERP system, and that's been increasing about 20% a year. So as we look at '13, it will be our peak year with our North American implementation. But again, we'll give you those exact numbers once we do our guidance for fiscal year '13.

Your next question comes from the line of David Lewis with Morgan Stanley.

David, I wonder if you talked about a dynamic in the next year. It sounds like, based on Vince's comments, the business development activity is more incremental over the next 2 years and sort of a radical change. And it sounds like you've dialed back the buy back next year sort of over $1 billion to something like $400 million to $600 million. So I guess, I wonder why not get more aggressive on the buyback, and is it too early, given some of the headwinds and tailwinds, to start talking about a dividend acceleration in BD.

Just A couple of things on that, David. Good question. First is the buyback that we did over the past 2 years was driven by the bond offerings that we've done. If you take a look at where our cash is generated, the majority of our cash continues to be generated outside the United States. And as I said earlier, about 80% of our cash balance at the end of the quarter is outside the U.S. So the cash that we generate within the U.S. pretty much covers the dividend. And if you think about the share repurchases next year, that's pretty much being funded by the sale of the Discovery Labware business. So as we move forward, that's something for you to consider.

And then, Vince, just talking about the SSI acquisition, I guess, certainly, it was a adjunctive to the business. I guess it wasn't entirely clear to us was. Was the driver of the transaction more the Med/Surg technology or really was the Pharm Systems technology? And it still wasn't clear if it was Pharm Systems-driven. What specifically does that transaction give you in Pharm Systems that you did not have before?

Well, Bill Kozy can talk to that, but it definitely was the Pharm Systems segment that was really driving this acquisition, and Bill can talk to -- because it moves us into a new space we weren't in before.

David, it's Bill Kozy. Just to add, let's go down the technology side for just a second. We wanted a short-term capability for passive needlestick safety on our Pharm Systems platform. So their technology gives us that chance to move into that right away. And we see, over time, an accelerating customer interest in that type of technology which we did not have.

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

I just wanted to clarify, David, your comments because the line cut out, or at least mine did. When you were referring to the change in guidance from an EPS perspective over the 2 components between what was Discovery Labware versus FX?

Okay, Discovery Labware was $0.29, and FX was $0.04.

Okay, perfect. And Discovery Labware seems to be a little bit more than what you have been saying. I'm just surprised it's a little higher, as well as the fact that, I guess, you're still absorbing some of the costs within the operating side.

Sorry, Kristen. Just coming back to your previous question, were you referring to the quarter or were you referring to the full year?

No, the full year guidance, I'm sorry.

Okay, I was referring to the full year.

Yes, that's what I was referring to [ph].

Okay, you got it. Okay.

I'm just looking at the $0.29. I think in the past you had kind of quantified it closer to $0.25 that it would contribute to the full year, and I'm just surprised that it's $0.29 versus the $0.25, especially I think you had mentioned within SSG&A you were still absorbing some costs that weren't allocated into that business. Is that how I should think about it?

Yes, 2 things. One is better performance than we anticipated was one of the drivers. If you remember, we originally guided about $0.25, as you had said. The better performance in the business is one of the things. As we strip that out, it wound up doing better in the second half of the year than we originally anticipated, as most of our businesses have. Also, I think the second thing is we go through and refined all of the allocated overhead costs. That was the second thing, that some of the costs that are remaining with the business are a little higher than we had originally estimated. And as we move into next year and once this deal becomes finalized, we'll be able to go after those stranded costs and look to remove those costs next year. Obviously, we're not going to do that until the deal is finalized.

Sorry if I missed this, but did you quantify what the stranded costs were within SG&A?

Yes, the stranded cost for the quarter was about $0.03 to EPS or about $8 million. For the full year, it's around $0.10.

And so presumably, as we go into 2013, those get worked down but don't necessarily go away immediately?

Again, we'll update you in November when we give guidance for the full fiscal year.

And then, I guess, also just kind of going back to some of the comments you had made on 2013. I guess, should we think about just the med tech tax as something that is likely just to get passed through and have just a full impact on your earnings side? Or would you be looking to try to offset that through restructuring, cost savings initiatives, price increases?

Yes, really, on that one, it remains as we previously talked about. We're going to look to offset some of that as we can, but that's going to be incorporated into our overall guidance as we look into -- as we provide guidance in November on fiscal year '13. I don't know if Vince has anything to add.

As David said, we'll look to do what we can, but we're also going to fund our strategic initiatives. So it's going to be a balancing act that we're going to be doing. We're looking at all elements of our cost structure for next year in trying to drive our efficiency programs. But that, as we know, provides significant headwind.

The pension expense may also be a headwind, is that fair to say?

Of course. Yes.

Yes, that's fair to say.

Your next question comes from the line of Jon Groberg with Macquarie Capital.

Just 2 quick questions for me. The first is a bigger picture. Vince, I think you've had an initiative going on there at BD on the talent and culture side for a couple of years now. I'm just thinking now you're getting closer to about 1 year in your role as CEO and just -- can you maybe just give us an update of how that's going and kind of what -- maybe what has changed or how you expect that to impact the business?

Well, you're right, we have. And the first thing I would say is that we're driving more -- the more global nature of the culture. And we've made some changes so that, as we look to the future, that we give a more full voice, I would say, in terms of the regions and especially the emerging markets. And so that's #1 on our list. And it's not just a cultural change piece, but it's also a capability piece that we're building around the globe. And that is more entrepreneurship, building marketing capability, building government affairs around the globe and, ultimately, R&D. And I've added 2 senior people to my direct reports to get further focus on international. And of course, we see a lot of growth coming from international over the next couple of years. Secondly, we're driving an innovation agenda for the company, and Bill Kozy has been heading this up for me, working with others in the organization. And we see a tremendous excitement around that agenda for the company. And so that's the second piece. And that's married with one other piece I would like to put on the table, which is customer-centricity. We hired a Chief Marketing Officer for the company, and there's a much more intense focus on the customers here. And so what we're doing is we're marrying up this innovation focus with this customer focus, and that dovetails with the global piece of this, the global view of the customers and where we're going. Do I think we're making progress? Absolutely. I think we're making progress. I also think that this is a long journey that you take step by step in terms of building real capability. But we're excited about it.

That's very helpful. And then if I can just quickly switch to the -- other than the AECC, and there was actually a lot excitement around BD MAX and kind of what its capabilities were going to be. Can you maybe just talk about what your expectations are for that product or business now that it's launched with kind of a more complete test and some of the menu you expect? And maybe also in that environment as well, just on the Diagnostics side, there was a big combination of the competitive front there with Hologic and Gen-Probe. Can you maybe just talk about how you see that changing the competitive environment for you?

Sure. So Tom will do that. I would say, before he makes a remark, that I think we're really taking an innovative approach to menu here, and that's starting to take hold, and Tom can update you on that. So Tom, why don't you start with BD MAX, and then we can talk about Hologic. Thanks.

Yes, this is Tom Polen. So obviously, right now, with the launch of really the first major assay in a major market, U.S. being by far and away the largest market for Molecular Diagnostics, MRSA is our first. We had GBS approved last quarter, a relatively small assay. MRSA represents the first large assay we have in MAX in our major markets. So right now, because that just happened a few weeks ago, our focus is on launch of MRSA and MAX. And again, we're seeing some good early traction there that we expect over the next couple of quarters because of the sales cycle there. We'll start seeing that reflected in the performance of that business. We do have, as we've shared in the past multiple times, an aggressive menu for MAX. We've got over 15 assays in the pipeline for MAX. The next assay, as Vince mentioned earlier, to launch will be C. diff, and we are on track to submit that to the FDA later this quarter. We have finished the clinical trial and are preparing the submission now, and that will go in later this quarter. We also are very pleased with the progress on our partner assays. We've put out announcements over the last year regarding 12 assays that are being developed through our partners. And we expect the first of those to begin launching in the EU before the end of this calendar year, and so we'll be making further announcements as those launch dates approach. But we're rapidly seeing menu expansion, particularly outside the U.S., where just because of the CE marking process, we can get to market earlier. So I would ask that probably look at EU as the first sign of where you'll see our significant menu ramps starting to come to the marketplace. So I think hopefully that answers your question.

Hologic.

Oh, I'm sorry, on Hologic, I know we've commented that on the last quarter as well. No change essentially on the response from last quarter's call. Of course, Gen-Probe has been very publicly in play over the last year, and so the acquisition didn't come as a surprise. We've made our integrated molecular cytology strategy in Women's Health, very clear for some time now, through Totalys and the Viper LT platforms that Vince spoke about earlier. And so we see the move. Hologic makes it clear they see value on a similar approach. We're continuing full speed ahead with our strategy and don't see any specific change to our approach at this point in time.

Thanks, Tom.

Your next question comes from the line of Mike Weinstein from JPMorgan. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: So David, can you just clarify what the guidance is for the fourth quarter because I think there's some confusion? Obviously, there's a lot of moving parts here with Discovery Labware coming out of it. So what exactly is the 4Q EPS guidance?

We didn't guide specifically the fourth quarter as we normally don't, which is provided it for the full year. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay, but you've given full year guidance. You have 3 quarters to date, including -- right, including what you just reported in you're divesting Discovery Labware. So the map that we were getting was somewhere in the $1.38 to $1.43 range. Is that right? We also were getting a couple of cents lower than that.

Yes, again, we're not providing specific guidance on the quarter. But if you take the full year results, we're at the $5.33 to $5.38, you're going to get into that range. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: Okay. And is 3 -- I'm sorry, got a few questions, is $3.95 the right number for the 3 quarters to date?

Yes, that's the right number. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: That is the right apples-to-apples number then?

Yes, that's right. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: That's helpful. Can you help me out in a couple of items of the -- How should we think about the FX move and the drop-through to the bottom line? I know you've talked before about 20% to 25% drop-through. Is that the math that you're using to get to the EPS delta for the fourth quarter, just so we can think forward?

Yes, it fluctuates from quarter to quarter based upon the individual currency. Some currencies drop through more than others. And as I said earlier on the call, 2 other currencies that really weakened against the dollar was the Indian rupee, as well as the Brazilian real. I think in this last quarter, it was around 30%, but again, that fluctuates quarter to quarter. But if you're in that 25% range, Michael, it's a pretty good number to use from a currency perspective. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: And I have 2 left clean-ups here. The change in the tax rate for the year, is that because of Discovery Labware? Is it primarily -- how do we think about that? Just trying to get all the pieces right.

Yes, it's primarily Discovery Labware. The majority of that business is in the U.S. So it has a high tax rate, over 35%. But also we are continuing to see good movement on our effective tax rate. Two things that drive that: one is the tax planning that we're doing; but two, it's just our mix of business. More of our business comes from outside the United States that helps affect our tax rate. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: And then last question. With the SurePath Plus decision, do you need to write down any assets from the TriPath acquisition?

No.

No, we don't.

Your next question comes from the line of Brian Weinstein with William Blair. Brian Weinstein - William Blair & Company L.L.C., Research Division: A question, Tom, just to follow-up on the BD MAX. Can you talk a little bit about where you're targeting for early customer success with the MAX? Are you looking at new accounts without molecular programs today? Are you looking at kind of where you guys have systems today? Are you going after competitive wins? What's the strategy there?

So I don't know that we want to get too detailed on exactly where we're going, but we think we have obviously, some issues in terms if we want to upgrade our current base, but we think it's attractive to the entire marketplace. We're not going to get real detailed about our tactics on the call. Brian Weinstein - William Blair & Company L.L.C., Research Division: And then you mentioned pricing pressure, particularly I think you said on high-volume STD testing. Can you quantify that? And is that a response to -- so something that you're seeing for home competitors? Are you driving it -- is it U.S. or o U.S. [ph] on that?

This is Tom Polen. Wouldn't quantify that. I think that's a -- it's been a well-recognized and, I know, a well quoted trend across the industry that STD pricing pressure in the U.S. and Europe are certainly not something that we're necessarily proactively driving ourselves. Leave it at that.

Your next question comes from the line of Doug Schenkel with Cowen and Company.

I guess just a couple of follow-ups on those last couple of questions. As has been well documented since the beginning of the year, there's been the approval of what I think could be characterized as some formidable competitive platforms for molecular, chlamydia, gonorrhea testing and other assays, including PANTHER in the U.S. and the new cobas 4800. Could you just talk about how the introduction of these products, I guess beyond pricing, may impact your ability to get customer switches, just given that it is fairly normal for folks to lock into multiyear re-agent rental contracts? And then I guess my second question, somewhat related, is in our channel checks, the feedback recently has been quite positive on BD MAX. It does seem like there is a lot of excitement around the new MRSA test. Could you just talk about how important that is from a price stabilization standpoint? And if you would, would you characterize how big the opportunity, as you view it, is to convert other competitive open real-time PCR systems, basically to convert others from some of the existing open PCR systems that exist on the market?

Okay, so this is Tom Polen again. Let's start with MAX, and then I'll circle back on regarding the high throughput side. So I mean, as you said, we are also getting very positive feedback from customers. I don't think we don't want to quantify the size of the opportunity at this point in time. Obviously, that expands in proportion to our menu and as customers continue to get traction on developing their own assays on the system. We are seeing, as you said, customers, particularly starting in Europe, developing a wide range of assays on MAX. We have customers running everything from neuro virus to cystic fibrosis to TB assays that they've developed themselves converted over to homebrew; from homebrew to other open platforms to the MAX. So as we think about positioning of the MAX platform versus the Viper, and as you mentioned, those incoming competitors, so we certainly recognize that MAX is in a unique space versus some of the platforms that you mentioned earlier. MAX is designed for some of the midpoint assays like MRSA C.Diff. But we also have mentioned we have assays like GC/CT Trich coming to MAX x U.S. later in FY '13 and the U.S. at a later point in time. So we see [indiscernible] has a very unique position [ph]. We have our assays coming on, and we'll have our partner assays coming on board, and it will have customers' assays being ported over from their other open systems, right. And none of the other platforms that you mentioned, I won't repeat them, have that ability to bring that type of portfolio to a single fully automated platform. As we think about our Viper franchise and the competitive dynamics happening there, we certainly recognize that there are new entrants coming into that space. We have a very, very solid platform with our Viper XTR platform, which is fully automated, integrated platform on the market today. We have our next-generation platform, which is our Viper LT, launching in the U.S. and in Europe next year, and that is also a bench-top version. So if you think about the PANTHER, not a bench-top version but -- similar volume throughput of Viper LT but an actual bench top. And then we'll have SDA and PCR on it. And of course, our first PCR assay based on that platform will be the HPV genotyping assay, which we are launching about this time, slightly earlier, next year x U.S. And then we'll be announcing the U.S. launch afterwards. So there we see our future instrument platforms, as well as assay menu expansion, as being key factors in continuing our strong position in that.

So this is Vince just adding on. So if you think about the Viper, because Tom is indicating there are 2 very different business segments here. In the STD space, the Chlamydia and HPV markets are available to us and also the genotyping space there. Now we're seeing on the HAI side, it's going to be the core area for MAX. With MRSA and the C. diff. markets all available to us, that tends to be not the same kind of high-volume as the STD marketplace, the HPV and Chlamydia. And then we're going to expand from there, which is all of the other assays that Tom is talking about in terms of transplant assays and other things, and then this kind of porting on these tests that the labs are doing themselves. So there's a substantial opportunity for us over time.

All right. That is very helpful. And I guess, if I could sneak in one quick one on -- one more quick one. On the flow cytometry side, clearly, some of the issues there are just funding related and the environment. But beyond that, from a competitive standpoint, are there any -- is there any light at the end of the tunnel? It sounds like part of the issue is just aggressive pricing from competitors. I guess at what point should investors think that, that dynamic becomes less of a headwind for you?

Bill Kozy can talk to that, but from a market standpoint, the U.S. market is going to be constrained till sometime after the elections, and there's an agreement on what the budget is going to be. And I've been down to Capitol Hill talking to Congress about this, but this whole threat of sequestration and our customers not knowing what their funding is going to be. We know we have at least another, probably, at least 9 months of uncertainty because Congress is talking about, well, it'll take 6 months now with the new Congress coming in to figure this all out. So that's a U.S. issue. We're seeing good growth internationally. So in terms of competition, I think, Bill, you feel pretty good about the product line that we have and where we're going with it.

Yes, this is Bill Kozy. I think that Vince captured the essence. We're probably paying more attention to the environment and the U.S. government direction at this point in time. That's our biggest gate. Our array of both high-end instruments, the addition of Accuri and the recent launch of FACSJazz and FACSVerse have got us very well positioned in each of those key flow segments. So we feel good about our products. We'll just look to see that environment improve in the time ahead.

Your next question comes from the line of Jonathan Palmer with CLSA. Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division: David, just want to follow up on the FX question. If we look at emerging markets, you guys had about 23% of revenues from there. Can you maybe just give us a range of how big maybe the big 3: China, India Brazil, are of that 23%?

A good way rule of thumb is if you think about the euro, we have about $2 billion in euro sales, which makes up the bulk. It ranges in that 60% to 70% of our foreign currency exposure. Brazilian real is probably the next largest, which is around 15% of our currency exposure. And then the Indian rupee is less than 10%. But that should give you a pretty good idea of the key ones that are driving that currency exposure. And as we saw in the quarter and one of the things we are doing with our guidance is contemplating that the dollar continues to strengthen, get to the bottom end of our range that contemplates that the dollar would continue to strengthen in August and in September. Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division: And then one quick follow-up. I guess in terms of China, do you conduct business there in RMB or is it a dollar market?

No, in local currency. Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division: And you see that strengthening?

Well, China is a bit of a unique situation, so -- since that's really controlled, and that's more of anyone's guess as where that's going to go.

[Operator Instructions] Your next question comes from the line of Bill Quirk with Piper Jaffray.

First off, David, just clarify an earlier comment you made on the future buybacks. You did, I think, mention that the cash flow, U.S. cash flow generation, essentially covers the dividend but kind of implied that it doesn't cover the buyback. So how should we read into that as we think about future years, fiscal '14, '15, et cetera.

Yes, there's a couple things to keep in mind as we move forward. One is, obviously, any type of tax planning that goes on, as Vince has talked about in previous calls, we have to see what happens with any kind of repatriation of overseas cash. We're not alone in this. This affects a lot of companies. So that's number one. Number two, there's things that we can do continuously. We repatriate funds and pay tax on that year-over-year. So that's an option that we have as we move forward. So those are the 2 main things that really impact the level of cash that we have in the U.S.: tax policy and our ability to repatriate, pay the tax from cash that's overseas.

And then just a quick follow-up maybe for Bill or Vince. Can you talk a little bit about what the Pharm Systems pipeline looks like? I guess I'm trying to think of that in context with we got a couple of pretty light flu seasons and just trying to think about what the forward implications of that might be.

So in terms of the revenue, if that's what you're asking and the fact that the business is lumpy, continues to be lumpy, so that's going to happen quarter-to-quarter. In terms of it, if you were asking from a product pipeline, then we're excited about this move into both SAIS, which is self-administration products, and we're starting to see some traction there. And Bill can talk to you about what those products are. And then of course, just move into an additional segment we have not participated in, which is the passive safety segment. So Bill, maybe you want to talk to that a little bit, where we're going with SAIS.

This is Bill Kozy. We are starting to get traction, to echo Vince's comment on the autoinjector. And we have a couple generations -- to your portfolio question, we've got a couple of generations of autoinjectors that we expect to launch in the years ahead. This tends to be a little bit more of a mass customization business, where we provide a major pharmaceutical customer with an injector that best matches up with both their patient population, as well as the drug that needs to be delivered. And we actually saw a revenue impact the first time, very, very modest, this last quarter on that area. Now in the core area, to your comment about what's in the pipeline, all of our attention in terms of R&D investment has been 2 categories: it's on biotech and vaccines. And it's a little early to be saying exactly what we intend to do there over the next couple of years, but we'll keep you informed on those product launches as they start to emerge in the 18 to 24 months ahead. Those are the 2 focus areas if you look at our large customer base.

Your next question comes from the line of Jeff Frelick with Canaccord.

Tom, just a follow-up to your BD MAX menu comment. When would you expect to see the test menu of 15 assays on the platform?

Plain timing. Yes, Tom.

Over the next 3 years. Sooner than that in Europe, of that time frame in the U.S.

Your final question comes from the line of Eric Criscuolo with Mizuho Securities.

What were the reasons for the sequential decline in interest income and other income?

David can handle that for you.

Yes, there's 2 things. One is the interest rate in Brazil. We hold some cash there, and obviously, interest rate has to come down. Also, just to remind everyone, deferred compensation, there's an offset versus our SG&A line, and that's the other big one that's there.

That was in the other income?

That's right. In other income, there's an offset versus our SG&A for deferred compensation. Whenever there's movement in our deferred compensation from a share price perspective on the overall stock market, you have higher costs in SG&A, which is offset in other income.

Okay, well, thank you very much for joining us today. That wraps up our call. We look forward to talking about and wrapping up the year with you on our next call and, of course, giving you the guidance for 2013, which you've been asking about for a long time now. And so we look forward to giving you that clarity. Just to finish up, we had solid revenue growth, underlying of about 4%. We can see good progress on our profitability improvement programs and our product portfolio, and expansion in emerging markets is on track. So thank you very much, and look forward to talking to you again.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.