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BCR > SEC Filings for BCR > Form 10-Q on 24-Apr-2013All Recent SEC Filings

Show all filings for BARD C R INC /NJ/ | Request a Trial to NEW EDGAR Online Pro

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


24-Apr-2013

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, Inc. and its subsidiaries (the "company" or "Bard"). The following discussion should be read in conjunction with Bard's 2012 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 three months ended March 31, 2013, the company's research and development ("R&D") expense as a percentage of net sales was 8.0%. 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.

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. During the quarter ended March 31, 2013, the company recorded to marketing, selling and administrative expense an excise tax of $8.0 million.

Results of Operations

Net Sales

Bard's consolidated net sales for the quarter ended March 31, 2013 increased 1% on both a reported basis and 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 ended March 31, 2013 by approximately 110 basis points as compared to the same periods in the prior year. Exchange rate fluctuations had the effect of increasing consolidated net sales for the quarter ended March 31, 2013 by 20 basis points as compared to the same period 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.

Bard's United States net sales of $498.5 million for the quarter ended March 31, 2013 were flat compared to $496.2 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 $241.8 million for the quarter ended March 31, 2013 increased 3% on both a reported basis and constant currency basis compared to $233.8 million in the prior year quarter.


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

Product Group Summary of Net Sales

                                              Quarters Ended March 31,
                                                                         Constant
                                   2013        2012       Change         Currency
          (dollars in millions)
          Vascular                $ 203.2     $ 209.2          (3 )%            (3 )%
          Urology                   188.8       185.1           2 %              2 %
          Oncology                  207.1       198.9           4 %              4 %
          Surgical Specialties      120.3       114.7           5 %              5 %
          Other                      20.9        22.1          (5 )%            (6 )%

          Total net sales         $ 740.3     $ 730.0           1 %              1 %

Vascular Products - Bard markets a wide range of products for the peripheral vascular market, including endovascular products, electrophysiology products and vascular graft products. Consolidated net sales of vascular products for the quarter ended March 31, 2013 decreased 3% on both a reported basis and constant currency basis compared to the prior year quarter due to a decline in sales of endovascular products and vascular graft products. United States net sales of vascular products for the quarter ended March 31, 2013 decreased 6% compared to the prior year quarter. International net sales of vascular products for the quarter ended March 31, 2013 increased 1% on a reported basis (flat on a constant currency basis) compared to the prior year quarter.

Consolidated net sales of endovascular products for the quarter ended March 31, 2013 decreased 2% on a reported basis (decreased 3% on a constant currency basis) compared to the prior year quarter. Declining sales of stents and biopsy products were the primary contributors to this decline. Net sales of stents for the quarter ended March 31, 2012 benefited from an issue with the availability of a competitor's products.

Consolidated net sales of electrophysiology products for the quarter ended March 31, 2013 were flat on a reported basis (decreased 1% on a constant currency basis) compared to the prior year quarter.

Consolidated net sales of vascular graft products for the quarter ended March 31, 2013 decreased 10% on both a reported basis and constant currency basis compared to the prior year quarter. Declining sales of peripheral vascular grafts were the primary contributors to the decrease in sales of vascular graft products for the quarter ended March 31, 2013.

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. Bard also markets Targeted Temperature Management™ products for therapeutic hypothermia. Consolidated net sales of urology products for the quarter ended March 31, 2013 increased 2% on both a reported basis and constant currency basis compared to the prior year quarter. This increase included sales growth of Targeted Temperature Management™ products and basic drainage 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. United States net sales of urology products for the quarter ended March 31, 2013 were flat compared to the prior year quarter. International net sales of urology products for the quarter ended March 31, 2013 increased 6% on a reported basis (5% on a constant currency basis) compared to the prior year quarter.

Consolidated net sales of basic drainage products for the quarter ended March 31, 2013 increased 3% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of infection control Foley catheter products for the quarter ended March 31, 2013 decreased 1% on both a reported basis and constant currency basis compared to the prior year quarter.

Consolidated net sales of urological specialty products, which include brachytherapy products, for the quarter ended March 31, 2013 decreased 5% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of brachytherapy products for the quarter ended March 31, 2013 decreased 9% on both a reported basis and constant currency basis compared to the prior year quarter. 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 March 31, 2013 decreased 4% on a reported basis (5% 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.


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Consolidated net sales of the StatLock ® catheter stabilization product line for the quarter ended March 31, 2013 decreased 1% on both a reported basis and constant currency basis compared to the prior year quarter.

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 ended March 31, 2013 increased 4% on both a reported basis and constant currency basis compared to the prior year quarter due primarily to growth in sales of PICCs and dialysis access catheters. United States net sales of oncology products for the quarter ended March 31, 2013 increased 4% compared to the prior year quarter. International net sales of oncology products for the quarter ended March 31, 2013 increased 4% on a reported basis (3% on a constant currency basis) compared to the prior year quarter.

Consolidated net sales of PICCs for the quarter ended March 31, 2013 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 March 31, 2013 increased 1% on both a reported basis and constant currency basis compared to the prior year quarter.

Consolidated net sales of dialysis access catheters for the quarter ended March 31, 2013 increased 8% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of vascular access ultrasound devices for the quarter ended March 31, 2013 increased 5% on both a reported and constant currency basis compared to the prior year quarter.

Surgical Specialty Products - Surgical specialty products include soft tissue repair products, performance irrigation devices and hemostasis products. Consolidated net sales of surgical specialty products for the quarter ended March 31, 2013 increased 5% on both a reported basis and constant currency basis compared to the prior year period. This increase included 5 percentage points of growth on both a reported basis and constant currency basis from the addition of surgical sealant products through the acquisition of Neomend, Inc. United States net sales of surgical specialty products for the quarter ended March 31, 2013 increased 5% compared to the prior year quarter. International net sales of surgical specialty products for the quarter ended March 31, 2013 increased 5% on both a reported basis and constant currency basis compared to the prior year quarter.

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 March 31, 2013 increased 3% on both a reported basis and constant currency basis compared to the prior year quarter. Net sales in this product line for the quarter ended March 31, 2013 were favorably impacted by growth in sales of natural-tissue hernia repair implants and natural-tissue breast reconstruction implants. This growth was offset by declines in 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:



                                                           Quarters Ended
                                                             March 31,
                                                        2013(A)        2012
        Cost of goods sold                                  39.9 %      38.3 %
        Marketing, selling and administrative expense       29.2 %      27.7 %
        Research and development expense                     8.0 %       6.6 %
        Interest expense                                     1.5 %       1.3 %
        Other (income) expense, net                          4.1 %      (0.1 )%

        Total costs and expenses                            82.8 %      73.8 %

(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 March 31, 2013 increased 160 basis points compared to the prior year quarter primarily due to the timing of operating costs and an asset write-down of approximately 30 basis points. Incremental amortization of intangible assets acquired in 2012 and 2013 increased the cost of goods sold as a percentage of net sales by approximately 20 basis points over the prior year quarter.


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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 ended March 31, 2013 increased 150 basis points compared to the prior year period. These costs as a percentage of net sales increased primarily due to the new excise tax on the U.S. sales of medical devices, related costs from operations acquired in 2012, 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 may impact the comparability of the company's results of operations between periods. Research and development expense for the quarter ended March 31, 2013 was $59.3 million, an increase of approximately 23% compared to the prior year quarter. These costs increased primarily due to targeted investments in this area, a trend that is expected to continue, and costs from operations acquired in 2012.

Interest expense - Interest expense was $11.4 million and $9.5 million for the quarters ended March 31, 2013 and 2012, respectively. This increase in interest expense was partially due to the issuance of $500 million of senior unsecured notes in October 2012.

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

                                                     Quarters Ended
                                                        March 31,
                                                    2013         2012
               (dollars in millions)
               Interest income                     $  (0.3 )    $ (0.4 )
               Foreign exchange losses (gains)         0.7        (1.1 )
               Litigation charges                     25.8          -
               Asset impairment                        3.8          -
               Other, net                              0.3         0.7

               Total other (income) expense, net   $  30.3      $ (0.8 )

Litigation charges - For the quarter ended March 31, 2013, the amount primarily reflects a write-down of an insurance receivable (see Note 7 of the notes to condensed consolidated financial statements).

Asset impairment - For the quarter ended March 31, 2013, the amount reflects a charge for the write-down of certain core technologies.

Income Tax Provision

The effective tax rate for the quarter ended March 31, 2013 was approximately 29%, compared to approximately 28% for the same period in 2012. The increase in the effective tax rate for the quarter ended March 31, 2013 reflected the discrete tax effect of a write-down of an insurance receivable (see Note 7 of the notes to condensed consolidated financial statements), which was incurred in a low tax jurisdiction. The effective tax rate for the current quarter was also impacted by the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013 and retroactively reinstated the research tax credit. Although the reinstatement of this tax credit is retroactive to January 1, 2012, the enactment of this legislation in 2013 precluded the company from recording the benefit in 2012. As a result, the company's income tax provision was reduced by approximately $3.7 million during the first quarter of 2013 to recognize the 2012 benefit of this tax credit that would have been recorded in 2012.

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 March 31, 2013 of $90.7 million and $1.08, respectively. Net income and diluted earnings per share available to common shareholders for the prior year quarter were $138.7 million and $1.60, respectively. The current year quarter reflects litigation charges of $25.0 million, or $0.30 per diluted share, asset impairments of $4.3 million, or $0.05 per diluted share, and acquisition-related items (primarily purchase accounting adjustments and transaction costs) of $0.7 million, or $0.01 per diluted share. The prior year quarter reflects acquisition-related items, primarily consisting of integration costs, of $0.8 million, or $0.01 per diluted share.


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Liquidity and Capital Resources

The company assesses its liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, acquisitions of businesses and technologies, cash dividends and common stock repurchases. Cash provided from operations continues to be a primary source of funds. The company believes that it could borrow adequate funds at competitive terms should it be necessary. The company also believes that its overall financial strength gives it sufficient financial flexibility. A summary of certain liquidity measures for Bard as of March 31 is as follows:

                                              2013          2012
                    (dollars in millions)
                    Working capital         $ 1,380.3     $  918.5

                    Current ratio              4.32/1       2.11/1

Cash and cash equivalents held by the company's foreign subsidiaries were $832.2 million and $786.1 million at March 31, 2013 and December 31, 2012, respectively. It is the company's intention to permanently reinvest the majority of these funds outside the United States to finance foreign operations, and the company's plans do not demonstrate a need to repatriate these funds. If these funds are needed for U.S. operations for currently unforeseen circumstances or can no longer be permanently reinvested outside the United States, the company would be required to accrue and pay U.S. taxes on the earnings associated with these funds. In the United States, ongoing operating cash flows and available borrowings under the company's committed syndicated bank credit facility provide it with sufficient liquidity.

For the three months ended March 31, 2013 and 2012, net cash provided by operating activities was $141.0 million and $165.7 million, respectively. The decrease in net cash provided by operating activities reflects lower net income and a discretionary cash contribution to the U.S. pension plan, partially offset by lower income tax payments and lower payments to claimants for Hernia Product Claims previously recorded in 2011.

For the three months ended March 31, 2013, net cash used by investing activities was $18.1 million compared to the $2.7 million net cash provided by investing activities in the prior year period. Capital expenditures were approximately $13.2 million and $19.6 million for the three month periods ended March 31, 2013 and 2012, respectively. Net cash provided by investing activities in the prior period reflects an increase of $17.3 million related to the release of restricted cash from qualified settlement funds to claimants pursuant to the proposed settlement of certain Hernia Product Claims.

For the three months ended March 31, 2013, the company used $136.7 million in cash for financing activities, compared to the $93.5 million used in the prior year period. Total debt was $1.4 billion at both March 31, 2013 and December 31, 2012. Total debt to total capitalization was 42.6% and 42.3% at March 31, 2013 and December 31, 2012, respectively. The company spent approximately $131.3 million to repurchase 1,308,639 shares of common stock in the three months ended March 31, 2013 compared to approximately $122.2 million to repurchase 1,377,316 shares of common stock in prior year period. The company paid cash dividends of $0.20 per share and $0.19 per share for the three month periods ended March 31, 2013 and 2012, respectively.

The company maintains a $600 million five-year committed syndicated bank credit facility that expires in October 2016. The credit facility supports the company's commercial paper program and can be used for general corporate purposes. The facility includes pricing based on the company's long-term credit rating and includes a financial covenant that limits the amount of total debt to total capitalization. At March 31, 2013, the company was in compliance with this covenant.

Contingencies

In the ordinary course of business, the company is subject to various legal proceedings and claims, including product liability matters, environmental matters, employment disputes, contractual disputes on agreements and other commercial disputes. In addition, the company operates in an industry susceptible to significant patent legal claims. At any given time in the ordinary course of business, the company is involved as either a plaintiff or defendant in a number of patent infringement actions. See Note 7 of the notes to condensed consolidated financial statements.

Management's Use of Non-GAAP Measures

Net sales "on a constant currency basis" is a non-GAAP measure. The company analyzes net sales on a constant currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on net sales, the company believes that evaluating growth in net sales on a constant currency basis provides an additional and meaningful assessment of net sales to both management and the company's


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investors. Constant currency growth rates are calculated by translating the prior year's local currency sales by the current period's exchange rate. Constant currency growth rates are not indicative of changes in corresponding cash flows. The limitation of these non-GAAP measures is that they do not reflect results on a standardized reporting basis. Non-GAAP measures are intended to supplement the applicable GAAP disclosures and should not be viewed as replacements of GAAP results.

Critical Accounting Policies

The preparation of financial statements requires the company's management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Such policies are summarized in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in Bard's 2012 Annual Report on Form 10-K. There have been no significant changes to the company's critical accounting policies since December 31, 2012.

Risks and Uncertainties; Cautionary Statement Regarding Forward-Looking Information

Certain statements contained herein or in other company documents and certain statements that may be made by management of the company orally may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "forecast," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to product approvals, future performance of current and anticipated products, sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. The company's forward-looking statements speak only as of the date of this report or as of the date they are made, and the company undertakes no obligation to update its forward-looking statements.

In addition, there are substantial risks inherent in the medical device business. The company's business involves the design, development, manufacture, packaging, distribution and sale of medical, surgical, diagnostic and patient care devices. These devices are often used on, or permanently or temporarily implanted, in patients in clinically demanding circumstances, such as operating . . .

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