CR Bard Inc.’s (BCR) third-quarter 2013 adjusted earnings of $1.50 per share surpassed the Zacks Consensus Estimate of $1.39 by an impressive margin of 7.9%. Although adjusted earnings declined 9% year over year, it exceeded the company’s previously announced guidance of $1.37-$1.41 a share.
Management asserted that the robust performance came on the back of strong top-line growth coupled with efficient cost control measures. Adjusted net income was $122.3 million, down 14% from $141.4 million in the third quarter of 2012.
In the quarter under review, net income (including one-time items) was $93.2 million or $1.15 a share, down from $129.3 million or $1.50 a share reported in the year-ago period. This is quite a turnaround from the net loss of $161.6 million or $2.03 a share reported in the prior quarter.
Revenues increased 5% (4% at constant exchange rate or CER) to $758.0 million and comfortably outpaced the Zacks Consensus Estimate of $740 million. On a geographic basis, revenues in the U.S. grew 3% to $500.3 million, beating the company’s expectations. International revenues rose 8% (up 6% at CER) to $257.7 million, with Europe growing 3% and Japan 4%, while other international business revenues grew 11%. The emerging markets contributed to 8% of total sales in the quarter.
On an adjusted basis, gross margin was 61.5%, down 80 basis points (bps) from the prior-year quarter but up 40 bps sequentially. Adjusted marketing, selling, and administrative expenses were 29.1% of net sales, 210 bps higher than the year-ago quarter. This was driven by the company’s increased investment in emerging markets, as well as the newly imposed medical device excise tax. Adjusted research and development expenses increased 180 bps to 8.7% of sales, driven by investments in emerging markets.
Segment Analysis
Revenues from the core Vascular segment increased 4% (2% at CER) to $209.9 million. We note that revenues improved significantly compared with the 4% decline reported in the second quarter of 2013.
Within Vascular, Electrophysiology (“EP”) revenues grew 7%, led by easy year-over-year comparisons for EP LabSystems sales. Disposable EP sales decreased 3%. Management asserts that plans for the sale of this underperforming unit to Boston Scientific (BSX) are on track. The divestment will be carried out in November.
Surgical graft sales were down 4% due to sustained softness in OEM orders. Endovascular sales improved 2%, with Biopsy product sales growing 10% in the quarter, reflecting competitive gains overseas. Revenues from peripheral PTA line increased 11%, driven by solid sales of the Lutonix drug-coated balloon in Europe. Vena Cava Filter sales were up impressively by 13% compared to a fall in the preceding quarter. However, revenues from the stent franchise dropped 23% year over year, as a Japanese competitor, which had pulled back its product line last year, re-entered the market.
Revenues from the Urology division increased 3% to $193.7 million, both in terms of reported and constant currency. The company’s targeted temperature management offerings once again experienced solid double-digit growth, both in the U.S. and international markets.
Within Urology, revenues from the basic drainage division were up 3% globally and 2% in the U.S. I.C. Foley sales inched up 1% internationally, but dropped 4% in the U.S, owing to continued pricing pressure. Continence segment’s sales were down 9% in the reported quarter, reflecting sluggish women health procedures in the U.S. Urological specialties sales were up 1% with flat sales from the brachytherapy business. Revenues from the StatLock catheter stabilization line inched up 1% in the quarter.
The company’s Oncology segment reported revenue growth of 6% to $215.5 million. Sales of peripherally inserted central catheters (PICC) climbed 7%, and revenues from the Port franchise increased 4%. Revenues from the Vascular Access ultrasound products and dialysis catheter products line increased 3% and 10%, respectively.
Revenues from Surgical Specialties business were up 10% (9% in terms of constant currency) to $118.1 million, led by strong sales of surgical sealant offerings acquired from Neomend. Soft tissue repair business improved 5% in the quarter. Revenues from the hernia fixation business were down 3%, while the performance irrigation business fell 14% in the third quarter.
Sales from Other segment remained flat year over year at $20.8 million in the reported quarter.
Financial Condition
CR Bard ended the third quarter of 2013 with cash, restricted cash and short-term investments of $800.7 million, down from $868.3 million as of Jun 30, 2013. Total debt was $1.5 billion as of Sep 30, unchanged from the same as of Jun 30. Debt to total capital ratio was about 50% at the end of the third quarter. Total shareholder investment was $1.5 billion as of Sep 30, 2013. Capital expenditures totaled $16.7 million in the quarter.
Guidance
Moving ahead, C.R. Bard expects revenue growth at CER in the range of 1% to 3% in the fourth quarter of 2013. This includes the impact of the acquisitions and the divestiture of the EP business, which essentially offset each other in the quarter. Benefits from the Gore litigation are expected to realize in 2014. Management expects tough year-over-year comparisons in the fourth quarter, specifically in biopsy and soft tissue repair.
On the earnings front, the company expects adjusted earnings in the range of $1.34 to $1.39 a share. We note that the current Zacks Consensus Estimate for the quarter is $1.67, which is higher than the predicted range.
On the back of better-than-anticipated third-quarter results, BCR raised its full year-2013 adjusted EPS guidance to the range of $5.70 to $5.75 a share, from the earlier guided range of $5.55 to $5.60. Management projects that the divestment of the EP business will dilute 2013 earnings by 10 cents. The current Zacks Consensus Estimate for the year is pegged at $5.92.
Our View
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.
Further, the company’s claim that the Gore litigation is moving in a positive direction and is about to be complete instills confidence. However, there is always a degree of uncertainty related to legal matters.
BCR currently carries a Zacks Rank #3 (Hold). While we remain neutral regarding the company, other companies like Align Technology Inc. (ALGN) and Cardinal Health, Inc. (CAH) are expected to do well in the medical/dental supply industry. Both stocks carry a Zacks Rank #1 (Strong Buy).
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