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BCR > SEC Filings for BCR > Form 10-Q on 24-Oct-2012All Recent SEC Filings

Show all filings for BARD C R INC /NJ/

Form 10-Q for BARD C R INC /NJ/


24-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This management's discussion and analysis provides a review of the results of operations, financial condition and the liquidity and capital resources of C. R. Bard and its subsidiaries (the "company" or "Bard"). The following discussion should be read in conjunction with Bard's 2011 Annual Report on Form 10-K, and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Certain statements contained herein may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995; see "Risks and Uncertainties; Cautionary Statement Regarding Forward-Looking Information" below.

Overview

The company designs, develops, manufactures, packages, distributes and sells medical, surgical, diagnostic and patient care devices. The company sells a broad range of products to hospitals, individual healthcare professionals, extended care health facilities and alternate site facilities on a global basis. Outside the United States, Europe and Japan are the company's largest markets, while certain emerging markets in Asia and Latin America are the company's fastest growing markets. In general, the company's products are intended to be used once and then discarded or either temporarily or permanently implanted. The company reports sales in four major product group categories: vascular; urology; oncology; and surgical specialties. The company also has a product group category of other products.

The company's earnings are driven by its ability to continue to generate sales of its products and improve operating efficiency. Bard's ability to increase sales over time depends upon its success in developing, acquiring and marketing differentiated products that meet the needs of clinicians and their patients. For the nine months ended September 30, 2012, the company's research and development ("R&D") expense as a percentage of net sales was 6.9%. The company expects R&D expense as a percentage of net sales to increase in future years. The company also makes selective acquisitions of businesses, products and technologies, generally focusing on small-to-medium sized transactions to provide ongoing growth opportunities. In addition, the company may from time-to-time consider acquisitions of larger, established companies. The company may also periodically divest lines of business in which it is not able to reasonably attain or maintain a leadership position in the market or for other strategic reasons.

Recent Developments

On October 19, 2012, the company acquired Neomend, Inc. ("Neomend"), a privately-held company engaged in the development and commercialization of innovative surgical sealants. The purchase consideration consists of an up front cash payment of $140 million and contingent consideration of up to $25 million, based on the achievement of sales-based milestone payments through 2016. Neomend's products expand Bard's existing surgical specialties product portfolio to include the only product approved by the U.S. Food and Drug Administration for the treatment of intraoperative air leaks in connection with thoracic surgery. Neomend's proprietary technology and pipeline provides the opportunity for future clinical indications across a variety of surgical specialty applications. Substantially all of the purchase price for this acquisition was funded through the issuance of commercial paper.

Healthcare Reform

Significant reforms to the U.S. healthcare system were adopted in the form of the Patient Protection and Affordable Care Act of 2010 (the "PPACA"). The PPACA requires, among other things, the company to pay a 2.3% excise tax on most U.S. medical device sales beginning in 2013. While the company continues to evaluate the impact of this tax on its overall business, based on 2011 annual U.S. sales, the excise tax would have equated to approximately $44 million.

Results of Operations

Net Sales

Bard's consolidated net sales for the quarter ended September 30, 2012 increased 1% on a reported basis (3% on a constant currency basis) compared to the same period in the prior year. Bard's consolidated net sales for the nine months ended September 30, 2012 increased 2% on a reported basis (4% on a constant currency basis) compared to the same period in the prior year. Net sales "on a constant currency basis" is a non-GAAP measure and should not be viewed as a replacement of GAAP results. See "Management's Use of Non-GAAP Measures" below. Price changes had the effect of decreasing consolidated net sales for the quarter and nine months ended September 30, 2012 by approximately 130 and 140 basis points, respectively, as compared to the same periods in the prior year. Exchange rate fluctuations had the effect of decreasing consolidated net sales for both the quarter and nine months ended September 30, 2012 by 2% as compared to the same periods in the prior year. The primary exchange rate movement that impacts net sales is the movement of the Euro compared to the U.S. dollar. The impact of exchange rate movements on net sales is not indicative of the impact on net earnings due to the offsetting impact of exchange rate movements on operating costs and expenses, costs incurred in other currencies and the company's hedging activities.


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Bard's United States net sales of $483.4 million for the quarter ended September 30, 2012 decreased 1% compared to $486.5 million in the prior year quarter. Net sales in the United States have moderated in recent quarters, a trend that may continue. International net sales of $239.5 million for the quarter ended September 30, 2012 increased 3% on a reported basis (11% on a constant currency basis) compared to $232.7 million in the prior year quarter. Bard's United States net sales of $1,469.6 million for the nine months ended September 30, 2012 increased 1% compared to $1,453.5 million in the prior year period. International net sales of $725.9 million for the nine months ended September 30, 2012 increased 5% on a reported basis (10% on a constant currency basis) compared to $691.0 million in the prior year period.

A summary of net sales by product group category is as follows:

Product Group Summary of Net Sales

                                              Quarter Ended September 30,                           Nine Months Ended September 30,
                                                                          Constant                                                  Constant
                                      2012        2011       Change       Currency           2012          2011        Change       Currency
(dollars in millions)
Vascular                            $  202.5     $ 208.2        (3)%              1 %     $    633.0     $   621.7          2%              4 %
Urology                                188.1       182.2          3%              5 %          562.0         544.4          3%              4 %
Oncology                               203.9       198.9          3%              4 %          601.9         578.1          4%              5 %
Surgical Specialties                   107.7       107.6           -              2 %          333.8         333.4           -              1 %
Other                                   20.7        22.3        (7)%             (6 )%          64.8          66.9        (3)%             (3 )%

Total net sales                     $  722.9     $ 719.2          1%              3 %     $  2,195.5     $ 2,144.5          2%              4 %

Vascular Products - Bard markets a wide range of products for the peripheral vascular market, including endovascular products, electrophysiology products and vascular graft products. The decrease in consolidated net sales of vascular products for the quarter ended September 30, 2012 compared to the prior year period was due primarily to a decline in sales of electrophysiology products and vascular grafts. The increase in consolidated net sales of vascular products for the nine months ended September 30, 2012 compared to the prior year period was due primarily to an increase in sales of endovascular products partially offset by a decline in sales of electrophysiology and vascular graft products. United States net sales of vascular products for the quarter ended September 30, 2012 decreased 5% compared to the prior year quarter. International net sales of vascular products for the quarter ended September 30, 2012 increased 1% on a reported basis (11% on a constant currency basis) compared to the prior year quarter. United States net sales of vascular products for the nine months ended September 30, 2012 decreased 2% compared to the prior year period. International net sales of vascular products for the nine months ended September 30, 2012 increased 6% on a reported basis (13% on a constant currency basis) compared to the prior year period.

Consolidated net sales of endovascular products for the quarter ended September 30, 2012 were flat on a reported basis (increased 3% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of endovascular products for the nine months ended September 30, 2012 increased 5% on a reported basis (7% on a constant currency basis) compared to the prior year period. Stents and percutaneous transluminal angioplasty balloon catheters were the primary contributors to growth in this category for the nine months ended September 30, 2012. Net sales of stents for the quarter and nine months ended September 30, 2012 have benefited from an issue with the availability of a competitor's products.

Consolidated net sales of electrophysiology products for the quarter ended September 30, 2012 decreased 10% on a reported basis (4% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of electrophysiology products for the nine months ended September 30, 2012 decreased 6% on a reported basis (2% on a constant currency basis) compared to the prior year period.

Consolidated net sales of vascular graft products for the quarter ended September 30, 2012 decreased 11% on a reported basis (6% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of vascular graft products for the nine months ended September 30, 2012 decreased 9% on a reported basis (6% on a constant currency basis) compared to the prior year period.

Urology Products - Bard markets a wide range of products for the urology market, including basic drainage products, continence products and urological specialty products. Bard also markets StatLock® catheter stabilization products, which are used to secure many types of catheters sold by Bard and other companies. The majority of basic drainage products, StatLock ® catheter stabilization products and certain urological specialty products are sold through distributors. Bard also markets Targeted Temperature Management™ products, acquired in November 2011, for therapeutic hypothermia. The increase in consolidated net sales of urology products for the quarter ended September 30, 2012 compared to the prior year period


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included 5 percentage points of growth on a reported basis (6 percentage points of growth on a constant currency basis) from the addition of Targeted Temperature Management ™ products. This growth was partially offset by declines in sales of urological specialty products, StatLock ® catheter stabilization products and continence products, a trend that may continue. The increase in consolidated net sales of urology products for the nine months ended September 30, 2012 compared to the prior year period included 5 percentage points of growth on both a reported basis and constant currency basis from the addition of Targeted Temperature Management™ products. This growth was partially offset by declines in sales of urological specialty products and continence products, a trend that may continue. United States net sales of urology products for the quarter ended September 30, 2012 increased 3% compared to the prior year quarter. International net sales of urology products for the quarter ended September 30, 2012 increased 3% on a reported basis (9% on a constant currency basis) compared to the prior year quarter. United States net sales of urology products for the nine months ended September 30, 2012 increased 3% compared to the prior year period. International net sales of urology products for the nine months ended September 30, 2012 increased 3% on a reported basis (7% on a constant currency basis) compared to the prior year period.

Consolidated net sales of basic drainage products for the quarter ended September 30, 2012 were flat on a reported basis (increased 1% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of infection control Foley catheter products for the quarter ended September 30, 2012 decreased 1% on a reported basis (were flat on a constant currency basis) compared to the prior year quarter. Consolidated net sales of basic drainage products for the nine months ended September 30, 2012 were flat on a reported basis (increased 1% on a constant currency basis) compared to the prior year period. Consolidated net sales of infection control Foley catheter products for the nine months ended September 30, 2012 decreased 2% on both a reported basis and constant currency basis compared to the prior year period.

Consolidated net sales of urological specialty products, which include brachytherapy products, for the quarter ended September 30, 2012 decreased 9% on a reported basis (5% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of brachytherapy products for the quarter ended September 30, 2012 decreased 19% on a reported basis (14% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of urological specialty products for the nine months ended September 30, 2012 decreased 7% on a reported basis (5% on a constant currency basis) compared to the prior year period. Consolidated net sales of brachytherapy products for the nine months ended September 30, 2012 decreased 12% on a reported basis (9% on a constant currency basis) compared to the prior year period. The brachytherapy market has been losing procedural share to alternative therapies, a trend that may continue.

Consolidated net sales of continence products for the quarter ended September 30, 2012 decreased 3% on a reported basis (were flat on a constant currency basis) compared to the prior year quarter due primarily to a decline in sales of surgical continence products, a trend that may continue. Consolidated net sales of continence products for the nine months ended September 30, 2012 decreased 9% on a reported basis (7% on a constant currency basis) compared to the prior year period due primarily to the discontinuation of sales of a bulking continence product and a decline in sales of surgical continence products, a trend that may continue.

Consolidated net sales of the StatLock® catheter stabilization product line for the quarter ended September 30, 2012 decreased 4% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of the StatLock® catheter stabilization product line for the nine months ended September 30, 2012 decreased 2% on a reported basis (1% on a constant currency basis) compared to the prior year period.

Oncology Products - Bard's oncology business includes specialty vascular access products and enteral feeding devices. Specialty vascular access products include peripherally inserted central catheters ("PICCs") used for intermediate to long-term central venous access, specialty access ports and accessories ("Ports") used most commonly for chemotherapy, dialysis access catheters and vascular access ultrasound devices which help facilitate the placement of PICCs. Consolidated net sales of oncology products for the quarter and nine months ended September 30, 2012 increased compared to the prior year periods due primarily to growth in sales of PICCs. United States net sales of oncology products for the quarter ended September 30, 2012 increased 1% compared to the prior year quarter. International net sales of oncology products for the quarter ended September 30, 2012 increased 6% on a reported basis (12% on a constant currency basis) compared to the prior year quarter. United States net sales of oncology products for the nine months ended September 30, 2012 increased 3% compared to the prior year period. International net sales of oncology products for the nine months ended September 30, 2012 increased 7% on a reported basis (11% on a constant currency basis) compared to the prior year period.

Consolidated net sales of PICCs for the quarter ended September 30, 2012 increased 5% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of Ports for the quarter ended September 30, 2012 were flat on a reported basis (increased 2% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of PICCs for the nine months ended September 30, 2012 increased 6% on a reported basis (7% on a constant currency basis) compared to the prior year period. Consolidated net sales of Ports for the nine months ended September 30, 2012 increased 1% on a reported basis (2% on a constant currency basis) compared to the prior year period.


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Consolidated net sales of dialysis access catheters for the quarter ended September 30, 2012 increased 1% on a reported basis (3% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of vascular access ultrasound devices for the quarter ended September 30, 2012 increased 2% on a reported basis (3% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of dialysis access catheters for the nine months ended September 30, 2012 increased 1% on a reported basis (2% on a constant currency basis) compared to the prior year period. Consolidated net sales of vascular access ultrasound devices for the nine months ended September 30, 2012 increased 8% on a reported basis (9% on a constant currency basis) compared to the prior year period.

Surgical Specialty Products - Surgical specialty products include soft tissue repair, performance irrigation and hemostasis product lines. United States net sales of surgical specialty products for the quarter ended September 30, 2012 decreased 2% compared to the prior year quarter. International net sales of surgical specialty products for the quarter ended September 30, 2012 increased 6% on a reported basis (13% on a constant currency basis) compared to the prior year quarter. United States net sales of surgical specialty products for the nine months ended September 30, 2012 were flat compared to the prior year period. International net sales of surgical specialty products for the nine months ended September 30, 2012 increased 2% on a reported basis (6% on a constant currency basis) compared to the prior year period.

The soft tissue repair product line includes synthetic and natural-tissue hernia repair implants, natural-tissue breast reconstruction implants and hernia fixation products. Consolidated net sales of soft tissue repair products for the quarter ended September 30, 2012 were flat on a reported basis (increased 2% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of soft tissue repair products for the nine months ended September 30, 2012 increased 1% on a reported basis (2% on a constant currency basis) compared to the prior year period. Net sales in this product line for the quarter and nine months ended September 30, 2012 were favorably impacted by growth in sales of synthetic hernia repair implants and natural-tissue breast reconstruction implants. This growth was offset by declines in natural-tissue hernia repair implants and hernia fixation products, a trend that may continue.

Other Products - The other product group includes irrigation, wound drainage and certain original equipment manufacturers' products.

Costs and Expenses

A summary of costs and expenses as a percentage of net sales is as follows:



                                                        Quarter Ended             Nine Months  Ended
                                                        September  30,               September 30,
                                                      2012          2011         2012(A)          2011
Cost of goods sold                                      37.7 %       38.2 %          38.2 %        38.0 %
Marketing, selling and administrative expense           27.2 %       26.3 %          27.5 %        27.1 %
Research and development expense                         7.2 %        6.5 %           6.9 %         6.6 %
Interest expense                                         1.3 %        1.3 %           1.3 %         1.3 %
Other (income) expense, net                              1.9 %        2.4 %           0.9 %         9.8 %

Total costs and expenses                                75.3 %       74.7 %          74.7 %        82.8 %

(A) Amounts do not add due to rounding.

Cost of goods sold - Cost of goods sold consists principally of the manufacturing and distribution costs of the company's products. The category also includes royalties, amortization of intangible assets and the impact of certain hedging activities. Cost of goods sold as a percentage of net sales for the quarter ended September 30, 2012 decreased 50 basis points compared to the prior year quarter. Cost of goods sold as a percentage of net sales for the nine months ended September 30, 2012 increased 20 basis points compared to the prior year period. Incremental amortization of intangible assets acquired in 2011 and 2012 increased the cost of goods sold as a percentage of net sales by approximately 70 basis points over both the prior year quarter and nine month period. This increase was offset by cost improvements.

Marketing, selling and administrative expense - Marketing, selling and administrative expense consists principally of the costs associated with the company's sales and administrative organizations. These costs as a percentage of net sales for the quarter and nine months ended September 30, 2012 increased 90 basis points and 40 basis points, respectively, compared to the prior year periods. These costs as a percentage of net sales increased primarily due to related costs from operations acquired in 2011 and continued investments in emerging markets.

Research and development expense - Research and development expense consists principally of costs related to internal research and development activities, milestone payments for third-party research and development activities, and acquired in-process R&D ("IPR&D") costs arising from the company's business development activities. IPR&D payments


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may impact the comparability of the company's results of operations between periods. Research and development expense for the quarter ended September 30, 2012 was $52.2 million, an increase of approximately 11% compared to the prior year quarter. Research and development expense for the nine months ended September 30, 2012 was $150.5 million, an increase of approximately 6% compared to the prior year period. An IPR&D charge of $2.0 million was recorded for the quarter and nine months ended September 30, 2012. IPR&D charges of $0.5 million and $3.5 million were recorded for the quarter and nine months ended September 30, 2011, respectively.

Interest expense - Interest expense was $9.7 million and $9.0 million for the quarters ended September 30, 2012 and 2011, respectively. Interest expense was $28.9 million and $27.1 million for the nine months ended September 30, 2012 and 2011, respectively.

Other (income) expense, net - The components of other (income) expense, net, are as follows:

                                            Quarter Ended           Nine Months  Ended
                                           September  30,              September 30,
                                          2012         2011         2012           2011
   (dollars in millions)
   Interest income                       $  (1.0 )    $ (1.2 )    $    (4.6 )     $  (3.1 )
   Foreign exchange (gains) and losses      (1.0 )       0.8           (0.6 )         0.9
   Asset impairments                        13.2          -            22.2            -
   Restructuring                              -         10.0           (1.6 )         8.9
   Impairment charge for bonds                -          7.0             -            7.0
   Legal settlements and commitments          -           -              -          195.5
   Other, net                                2.4         0.4            3.6           2.0

   Total other (income) expense, net     $  13.6      $ 17.0      $    19.0       $ 211.2

Asset impairments - For the quarter and nine months ended September 30, 2012, the amounts reflect a charge for the write-down of certain core technologies associated with a non-strategic product in the company's vascular product group. In addition, the amount for the nine months ended September 30, 2012 reflects impairments of assets not related to operations.

Restructuring - For the nine months ended September 30, 2012, the amount reflects the reversal of certain restructuring costs recognized in the second half of 2011 (see Note 3 of the notes to the condensed consolidated financial statements). For the quarter and nine months ended September 30, 2011, the amounts reflect restructuring costs and the reversal of certain restructuring costs recognized in the second half of 2010.

Impairment charge for bonds - For the quarter and nine months ended September 30, 2011, the amount reflects other-than-temporary impairment of Greek bonds.

Legal settlements and commitments - For the nine months ended September 30, 2011, the amount reflects the estimated costs of settling all Hernia Product Claims (other than the putative class action lawsuits), including costs to administer the settlements, (see Note 8 of the notes to condensed consolidated financial statements) and certain other legal settlements and commitments.

Income Tax Provision

The effective tax rate for the quarter ended September 30, 2012 was approximately 27%, compared to approximately 29% for the same period in 2011. The effective tax rate for the nine months ended September 30, 2012 was approximately 28% compared to approximately 42% for the same period in 2011. The higher effective tax rate for the prior nine month period reflected the discrete tax effect of a charge for legal settlements, primarily related to Hernia Product Claims, which were incurred in a low tax jurisdiction.

Net Income and Earnings Per Share Available to Common Shareholders

The company reported net income and diluted earnings per share available to common shareholders for the quarter ended September 30, 2012 of $129.3 million and $1.50, respectively. Net income and diluted earnings per share available to common shareholders for the quarter ended September 30, 2011 was $130.1 million and $1.46, respectively. The current year quarter reflects asset impairments of $8.0 million, or $0.09 per diluted share, and acquisition-related items, primarily consisting of an IPR&D charge and transaction costs, of $4.1 million, or $0.05 per diluted share. The prior year quarter reflects an impairment charge for Greek bonds of $7.0 million, or $0.08 per diluted share, net restructuring costs of $6.7 million, or $0.08 per diluted share, and acquisition-related items, primarily consisting of transaction costs and an IPR&D charge, of $2.2 million, or $0.03 per diluted share. The prior year quarter also reflects a . . .

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