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BCR > SEC Filings for BCR > Form 10-Q on 24-Jul-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-Jul-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 six months ended June 30, 2013, the company's research and development ("R&D") expense as a percentage of net sales was 8.4%. 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 June 27, 2013, the company reached a definitive agreement to sell certain assets and liabilities of its electrophysiology division ("BEP") to Boston Scientific Corporation for $275 million in cash. The transaction is expected to be completed in 2013, subject to certain regulatory and customary closing conditions. The company expects to record a gain on the sale when the transaction is completed. See Note 2 to the condensed consolidated financial statements.

During the second quarter of 2013, the company evaluated certain product liability matters based on information currently available, including: the allegations and documentation supporting or refuting such allegations; publicly available information regarding similar medical device mass tort settlements; historical information regarding other product liability settlements involving the company; and the procedural posture and stage of litigation. Based on these, and other factors, the company determined to record a charge, net of estimated recoveries to other (income) expense, net of approximately $293.0 million ($276.0 million after tax) in the second quarter of 2013, which recognized the estimated costs for certain product liability matters, including (with respect to such matters) asserted and unasserted claims, and costs to administer the settlements related to such matters. The charge excludes any costs associated with all but one pending putative class action lawsuit against the company. See Note 8 to the condensed consolidated financial statements.

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 and six months ended June 30, 2013, the company recorded to marketing, selling and administrative expense an excise tax of $7.1 million and $15.1 million, respectively.

Results of Operations

Net Sales

Bard's consolidated net sales for the quarter ended June 30, 2013 increased 2% 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 six months ended June 30, 2013 increased 2% 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


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results. See "Management's Use of Non-GAAP Measures" below. Price changes had the effect of decreasing consolidated net sales for the quarter and six months ended June 30, 2013 by approximately 140 basis points and 130 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 the quarter ended June 30, 2013 by approximately 1 percentage point as compared to the same period in the prior year. Exchange rate fluctuations had a nominal impact on consolidated net sales for the six months ended June 30, 2013 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 $497.6 million for the quarter ended June 30, 2013 increased 2% compared to $490.0 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 $262.3 million for the quarter ended June 30, 2013 increased 4% on both a reported basis and constant currency basis compared to $252.6 million in the prior year quarter. Bard's United States net sales of $996.1 million for the six months ended June 30, 2013 increased 1% compared to $986.2 million in the prior year. International net sales of $504.1 million for the six months ended June 30, 2013 increased 4% on both a reported basis and constant currency basis compared to $486.4 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 June 30,                                 Six Months Ended June 30,
                                                                             Constant                                                   Constant
                                       2013        2012       Change         Currency          2013          2012        Change         Currency
(dollars in millions)
Vascular                              $ 212.2     $ 221.3          (4 )%            (4 )%    $   415.4     $   430.5          (4 )%            (4 )%
Urology                                 191.7       188.8           2 %              2 %         380.5         373.9           2 %              2 %
Oncology                                214.1       199.1           8 %              8 %         421.2         398.0           6 %              6 %
Surgical Specialties                    120.0       111.4           8 %              8 %         240.3         226.1           6 %              6 %
Other                                    21.9        22.0          -                -             42.8          44.1          (3 )%            (3 )%

Total net sales                       $ 759.9     $ 742.6           2 %              3 %     $ 1,500.2     $ 1,472.6           2 %              2 %

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 and six months ended June 30, 2013 decreased 4% on both a reported basis and constant currency basis compared to the prior year periods due to a decline in sales of endovascular products and vascular graft products. United States net sales of vascular products for the quarter ended June 30, 2013 decreased 2% compared to the prior year quarter. International net sales of vascular products for the quarter ended June 30, 2013 decreased 6% on both a reported basis and constant currency basis compared to the prior year quarter. United States net sales of vascular products for the six months ended June 30, 2013 decreased 4% compared to the prior year period. International net sales of vascular products for the six months ended June 30, 2013 decreased 3% on both a reported basis and constant currency basis compared to the prior year period.

Consolidated net sales of endovascular products for the quarter ended June 30, 2013 decreased 5% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of endovascular products for the six months ended June 30, 2013 decreased 4% on both a reported basis and constant currency basis compared to the prior year period. Declining sales of stents was the primary contributor to this decline. Net sales of stents for the quarter and six months ended June 30, 2012 benefited from an issue with the availability of a competitor's products.

Consolidated net sales of electrophysiology products for the quarter and six months ended June 30, 2013 decreased 1% on both a reported basis and constant currency basis compared to the prior year periods. Consolidated net sales of vascular graft products for the quarter ended June 30, 2013 decreased 4% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of vascular graft products for the six months ended June 30, 2013 decreased 7% on both a reported basis and constant currency basis compared to the prior year period. Declining sales of peripheral vascular grafts and dialysis access grafts were the primary contributors to the decrease in sales for vascular graft products for the quarter and six months ended June 30, 2013.


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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 and six months ended June 30, 2013 increased 2% on both a reported basis and constant currency basis compared to the prior year periods. These increases included sales growth of Targeted Temperature Management™ products, basic drainage products and urological specialty products. This growth was partially offset by declines in sales of StatLock® catheter stabilization products and continence products, a trend that may continue. United States net sales of urology products for the quarter ended June 30, 2013 decreased 2% compared to the prior year quarter. International net sales of urology products for the quarter ended June 30, 2013 increased 10% on a reported basis (11% on a constant currency basis) compared to the prior year quarter. United States net sales of urology products for the six months ended June 30, 2013 decreased 1% compared to the prior year period. International net sales of urology products for the six months ended June 30, 2013 increased 8% on both a reported basis and constant currency basis compared to the prior year period.

Consolidated net sales of basic drainage products for the quarter and six months ended June 30, 2013 increased 3% on both a reported basis and constant currency basis compared to the prior year periods. Consolidated net sales of infection control Foley catheter products for the quarter and six months ended June 30, 2013 decreased 1% on both a reported basis and constant currency basis compared to the prior year periods.

Consolidated net sales of urological specialty products, which include brachytherapy products, for the quarter ended June 30, 2013 increased 8% on a reported basis (9% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of brachytherapy products for the quarter ended June 30, 2013 increased 5% on a reported basis (7% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of urological specialty products for the six months ended June 30, 2013 increased 1% on a reported basis (2% on a constant currency basis) compared to the prior year period. Consolidated net sales of brachytherapy products for the six months ended June 30, 2013 decreased 2% on both a reported basis and constant currency basis. Despite the increase for the quarter ended June 30, 2013, 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 June 30, 2013 decreased 18% on a reported basis (17% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of continence products for the six months ended June 30, 2013 decreased 11% on both a reported basis and constant currency basis compared to the prior year period. The decrease was due primarily to 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 June 30, 2013 decreased 8% 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 six months ended June 30, 2013 decreased 5% on a reported basis (4% 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 ended June 30, 2013 increased 8% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of oncology products for the six months ended June 30, 2013 increased 6% on both a reported basis and constant currency basis when compared to the prior year period. These increases are due primarily to growth in sales of PICCs, Ports and dialysis access catheters. United States net sales of oncology products for the quarter ended June 30, 2013 increased 5% compared to the prior year quarter. International net sales of oncology products for the quarter ended June 30, 2013 increased 15% on both a reported basis and constant currency basis compared to the prior year quarter. United States net sales of oncology products for the six months ended June 30, 2013 increased 4% compared to the prior year period. International net sales of oncology products for the six months ended June 30, 2013 increased 10% on a reported basis (9% on a constant currency basis) compared to the prior year period.

Consolidated net sales of PICCs for the quarter ended June 30, 2013 increased 10% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of PICCs for the six months ended June 30, 2013 increased 8% on a reported basis (7% on a constant currency basis) compared to the prior year period. Consolidated net sales of Ports for the quarter ended June 30, 2013 increased 4% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of Ports for the six months ended June 30, 2013 increased 3% on both a reported basis and constant currency basis compared to the prior year period.

Consolidated net sales of dialysis access catheters for the quarter ended June 30, 2013 increased 5% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of dialysis access catheters for the six months ended June 30, 2013 increased 7% on a reported basis (6% on a constant currency basis) compared to the prior year period. Consolidated net sales of vascular access ultrasound devices for the quarter ended June 30, 2013 increased 12% 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 six months ended June 30, 2013 increased 8% on both a reported basis and constant currency basis compared to the prior year period.


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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 June 30, 2013 increased 8% on both a reported basis and constant currency basis compared to the prior year quarter. This increase includes 6 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. Consolidated net sales of surgical specialty products for the six months ended June 30, 2013 increased 6% on both a reported basis and constant currency basis compared to the prior year period, which includes 5 percentage points of growth on both a reported basis and constant currency basis from the addition of the surgical sealant products. United States net sales of surgical specialty products for the quarter ended June 30, 2013 increased 7% compared to the prior year quarter. International net sales of surgical specialty products for the quarter ended June 30, 2013 increased 10% on a reported basis (11% on a constant currency basis) compared to the prior year quarter. United States net sales of surgical specialty products for the six months ended June 30, 2013 increased 6% compared to the prior year period. International net sales of surgical specialty products for the six months ended June 30, 2013 increased 8% on both a reported basis and 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 June 30, 2013 increased 4% on both a reported basis and constant currency basis compared to the prior year quarter. Consolidated net sales of soft tissue repair products for the six months ended June 30, 2013 increased 3% on both a reported basis and constant currency basis compared to the prior year period. Net sales in this product line for the quarter and six months ended June 30, 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:



                                                    Quarter Ended               Six Months Ended
                                                       June 30,                     June 30,
                                                  2013          2012          2013           2012(A)
Cost of goods sold                                  39.0 %       38.5 %          39.5 %          38.4 %
Marketing, selling and administrative expense       29.8 %       27.7 %          29.5 %          27.7 %
Research and development expense                     8.7 %        6.7 %           8.4 %           6.7 %
Interest expense                                     1.5 %        1.3 %           1.5 %           1.3 %
Other (income) expense, net                         38.9 %        0.8 %          21.7 %           0.4 %

Total costs and expenses                           117.9 %       75.0 %         100.6 %          74.4 %

(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 and six months ended June 30, 2013 increased 50 basis points and 110 basis points, respectively, compared to the prior year periods. Incremental amortization of intangible assets acquired in 2013 and 2012 increased cost of goods sold as a percentage of net sales by approximately 20 basis points over both the prior year quarter and six month period. Also contributing to this increase is the impact of asset impairments of approximately 10 basis points and 20 basis points, respectively.

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 six months ended June 30, 2013 increased 210 basis points and 180 basis points, respectively, compared to the prior year periods. These costs as a percentage of net sales increased primarily due to the new excise tax on the U.S. sales of medical devices, targeted investments in this area, related costs from operations acquired in 2012 and continued investments in emerging markets.


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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 June 30, 2013 was $66.1 million, an increase of approximately 32% compared to the prior year quarter. Research and development expense for the six months ended June 30, 2013 was $125.4 million, an increase of approximately 28% compared to the prior year period. An IPR&D charge of $0.5 million was recorded for the quarter and six months ended June 30, 2013. 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 $11.1 million and $9.7 million for the quarters ended June 30, 2013 and 2012, respectively. Interest expense was $22.5 million and $19.2 million for the six months ended June 30, 2013 and 2012, respectively. The 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:

                                            Quarter Ended           Six Months Ended
                                              June 30,                  June 30,
                                          2013         2012         2013          2012
     (dollars in millions)
     Interest income                     $  (0.3 )    $ (3.2 )    $    (0.6 )    $ (3.6 )
     Foreign exchange losses                 2.1         1.5            2.8         0.4
     Litigation charges, net               292.4          -           318.2          -
     Asset impairments                       2.6         9.0            6.4         9.0
     Restructuring                          (1.4 )      (1.6 )         (1.4 )      (1.6 )
     Other, net                              0.3         0.5            0.6         1.2

     Total other (income) expense, net   $ 295.7      $  6.2      $   326.0      $  5.4

Litigation charges, net-For the quarter and six months ended June 30, 2013, the amounts reflect the estimated costs for product liability matters, net of recoveries. In addition, the amount for the six months ended June 30, 2013 reflects a write-down of an insurance receivable. See Note 8 of the notes to condensed consolidated financial statements.

Asset impairments-For the quarter and six months ended June 30, 2013, the amounts reflect charges for the write-down of certain core technologies. For the quarter and six months ended June 30, 2012, the amounts reflect impairments of assets not related to operations.

Restructuring-For the quarter and six months ended June 30, 2013, the amounts reflect the reversal of certain restructuring costs recognized during the fourth quarter of 2012. For the quarter and six months ended June 30, 2012, the amounts reflect the reversal of certain restructuring costs recognized in the second half of 2011.

Income Tax Provision

The effective tax rate for both the quarter and six month period ended June 30, 2013 reflected the discrete tax effect of litigation charges, primarily related to product liability claims, which were substantially incurred in a low tax jurisdiction. The effective tax rate for the current six month period reflected the discrete tax effect of a write-down of an insurance receivable, which was also incurred in a low tax jurisdiction. See Note 8 of the notes to the condensed consolidated financial statements. The effective tax rate 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 six months ended June 30, 2013 to recognize the 2012 benefit of this tax credit that would have been recorded in 2012.


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Net (Loss) Income and (Loss) Earnings Per Share Available to Common Shareholders

The company reported net loss and diluted loss per share available to common shareholders for the quarter ended June 30, 2013 of $161.6 million and $2.03, respectively. Net income and diluted earnings per share available to common shareholders for the prior year quarter were $133.9 million and $1.54, respectively. The current year quarter reflects litigation charges, net of $275.1 million, or $3.33 per diluted share, asset impairments of $3.0 million, . . .

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