CR Bard Earnings Beat but Fall Y/Y

Zacks

Medical technologies major C R Bard, Inc. (BCR) disappointed by posting a 20.3% fall in net earnings to $114.7 million in the 2013-fourth quarter from $143.9 million in the year-ago quarter and a 16.5% decrease in earnings per share to $1.42 from $1.70 in the fourth quarter of 2012. Nevertheless, earnings per share beat the Zacks Consensus Estimate by 3 cents.    

On reported basis, CR Bard’s earnings increased to $667.5 million or $8.28 per share in the quarter from $128.2 million or $1.52 per share in the year-ago quarter.     

Revenues in the quarter increased 4% (both on reported and constant exchange rate or CER) to $791.3 million and comfortably outpaced the Zacks Consensus Estimate of $779.0 million. On a geographic basis, revenues in the U.S. grew 4% to $517.7 million, while revenues outside the U.S. rose 3% to $273.6 million. Excluding the impact of foreign currency, revenues outside the U.S. increased 3% from the prior year.

Revenues from the emerging markets continue to increase and represented about 8.5% of BCR’s total revenue in the fourth quarter. During the quarter, BCR sold its electrophysiology division, which affected revenue growth in the quarter, particularly outside the U.S.

For full year 2013, net adjusted earnings decreased 16.0% to $474.9 million and 12.0% to $5.78 per share from $565.3 million and $6.57 per share in 2012. With this, earnings per share exceeded the Zacks Consensus Estimate of $5.75.

Revenues in the year inched up 3% to $3,049.5 million (both on reported and constant currency basis), which is higher than the Zacks Consensus Estimate of $3,036 million.
               
Adjusted gross profit declined marginally to $480.7 million in the quarter from $481.2 million in the fourth quarter of 2012. Adjusted gross margin fell 50 basis points (bps) to 60.8% due to impacts of pricing pressure, amortization and foreign currency. For full-year 2013, adjusted gross margin dipped 100 bps to 61% due to headwinds from foreign exchange, amortization and pricing pressure.

Product Group Results

Revenues from the core Vascular category decreased 3.4% (4% at CER) to $204.7 million. Sales in the U.S. and outside the U.S. dipped 4% and 5%, respectively. The decline in revenues was attributed to the divestiture of Electrophysiology business. Excluding the impact of divestiture, Vascular sales grew 2% in the quarter.

Revenues from vascular graft went down 4% but Endovascular business rose 2% in the fourth quarter. Within Endovascular business, biopsy line revenues went up 7%, driven by strong international growth, especially in the emerging markets.

Peripheral PTA product revenues were up 7% in the quarter with drug-coated balloons in Europe being the key driver of growth. Revenues from vena cava filter line increased 12% driven by new Denali filter. However, revenues from Stent business went down 7% due to continued price headwinds.

Revenues from the Urology business increased 3.4% to $202.4 million, both in terms of reported and constant currency. Revenues from the U.S. went up 4%, while it grew 3% internationally. The acquisition of Rochester Medical in November last year contributed to 200 basis points in global growth for this product category.

Within Urology, revenues from the basic drainage business increased 3%, with half of the growth generating from the acquired Rochester medical products. I.C. Foley's revenues were up 4% globally with a 1% fall in the U.S. Due to the Rochester acquisition, revenues from continence business grew 4% over the prior year quarter.

Revenues from urological specialties went down 4% with a 1% rise in brachytherapy revenues. Revenues from StatLock catheter stabilization line grew 3% in the quarter.

Revenues from the Oncology category rose 4.7% to $220.4 million, both in reported and CER basis. Revenues were up 3% in the U.S. and 9% outside the U.S. Revenues from port line were up 1%. Revenues from peripherally inserted central catheters (:PICC) grew 11% in the quarter with strong performance in the U.S. and abroad. However, revenues from Vascular Access ultrasound product line dipped 6% in the quarter due to a tough comp a year ago. Lastly, revenues from dialysis catheter business rose 2% in the fourth quarter.

Revenues from Surgical Specialties business escalated 15.9% (both in reported and CER) to $140.6 million. Revenues from the U.S. increased 17% while international revenues were up 13%. About 10 percentage points of the global growth was attributed to business development, which included the acquisition of Arista Hemostat product line.

Revenues from soft tissue repair business grew 6% in the quarter, while synthetic hernia products revenues rose significantly (double-digit) versus the last year’s quarter. Revenues from natural tissue products were down 5% in the quarter, Fixation business declined 5%, and Performance Irrigation business fell 5% in the quarter.

Revenues from Other product line increased marginally (roughly 1%) to $23.2 million from $23.0 million in the fourth quarter of 2012.

Financial Condition

CR Bard ended the fourth quarter with cash, restricted cash and short-term investments of $1.1 billion versus $801 million as of Sep 30, 2013. Total debt was $1.4 billion as of Dec 31, 2013 versus $1.5 billion as of Sep 30, 2013. Debt to total capital ratio was roughly 40% as of Dec 31, 2013.

Capital expenditures amounted to $21.8 million for the quarter and $69.1 million for the year. The annual capital expenditure was about $20 million lower than BCR’s original guidance.

Share Repurchase

CR Bard repurchased about 1.4 million shares of the company stock in the quarter, including a portion of the Gore proceeds. The company also announced an additional $500 million authorization for its share buyback program. It has returned over $800 million to shareholders in 2013 with an average price of $112.53.

Guidance

For 2014, C.R. Bard expects revenues to grow between 6% and 8% at CER, assuming revenues of $130 million–$140 million from Gore royalties. The company expects to record a modest level of sales due to its multiyear transition supply agreement with Boston Scientific Corp. (BSX), until the latter integrates manufacturing into their facilities.

Considering the product categories, BCR expects revenue growth between 5% and 8% for the Vascular line, 5% and 8% for the Urology line, 2% and 5% for the Oncology line, 7% and 10% for the surgical specialties line, and 5% and 10% in the other category.

During the year, C.R. Bard expects adjusted earnings per share between $8.20 and $8.30. The current Zacks Consensus Estimate of $7.51 lies below the guided range.

C.R. Bard expects capital expenditures between $100 million and $120 million for 2014. It also expects operating cash flow of roughly $700 million in the year.

BCR expects gross margin to improve between 30 and 60 bps from the prior year. This includes between 160 and 170 bps of benefit due to the estimated royalty from Gore and 50 bps of favorability from estimated cost savings.

For the first quarter of 2014, BCR expects adjusted earnings between $1.83 and $1.87 per share compared with the Zacks Consensus Estimate of $1.76. Revenues for the quarter are expected to grow between 6% and 7%, including the royalty payment from Gore.

Our Take

Although CR Bard managed to beat estimates this quarter, we remain concerned about the stringent sales environment facing the company, particularly in the U.S. Moreover, some of Bard’s businesses are experiencing significant pricing and competitive pressures and low-single digit growth in international markets.

We thus remain on the sidelines at present till the time its recent investment strategies help to increase profitability. However, we believe its recent announcement to divest the EP business along with initiatives to expand into emerging markets should boost growth in the long term.

BCR currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical/dental supply industry include Align Technology Inc. (ALGN) with a Zacks Rank #1 (Strong Buy) and Cardinal Health, Inc. (CAH) with a Zacks Rank #2 (Buy).

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