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Mixed 3Q for Bard; Profit Dwindles

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CR Bard Inc.’s third quarter 2012 adjusted earnings of $1.64 per share beat the Zacks Consensus Estimate by a penny and surpassed the year-ago earnings of $1.62 per share (up 1%). Adjusted earnings exclude one-time items such as acquisition-related expenses and asset impairment charges.

In the reported quarter, profit was $129.3 million (or $1.50 a share), down 1% from the year-ago quarter. Higher operating expenses dampened moderate revenue growth in the quarter.
Revenues inched up 1% (up 3% in constant currency) year over year to $722.9 million, but fell short of the Zacks Consensus Estimate of $735 million. Moderate growth across Urology and Oncology product groups was partially offset by declining Vascular sales.
On a geographic basis, revenues in the U.S. dipped 1% to $483.4 million due to sustained softness in the market. However, international sales grew 3% (up 11% in constant currency) to $239.5 million, led by solid sales in Japan and moderate growth in Europe. Moreover, international sales were boosted by double-digit growth in emerging markets.
Segment Analysis
Revenues from the core Vascular segment decreased 3% (up 1% in constant currency) year over year to $202.5 million. Within Vascular, endovascular sales grew 3%. Biopsy sales fell 1% year over year due to the prevailing softness in the U.S. economy. Electrophysiology (“EP”) revenues dropped 4% due to lower EP Lab system sales (down 8%) along with declining disposable EP sales (down 3%) and surgical graft sales (down 6%).
Revenues from peripheral PTA increased 7%, driven by double-digit sales from Chronic Total Occlusion (CTO) offerings. Vena Cava Filter sales decreased 4% in the reported quarter. Revenues from the stent franchise grew only 5%, as the Japanese competitor, who had pulled back its product line six months ago returned to the market.
Sales from Urology division increased 3% (up 5% in constant currency) to $188.1 million led by the company’s latest targeted temperature management products. Revenues from the basic drainage division were flat in the U.S and up 1% globally. I.C. Foley sales dropped 4% in the U.S and remained flat globally, as these segments faced continued pricing pressure.
Continence segment’s sales were flat year-over-year in the reported quarter, after declining for 10 straight quarters. The company’s fecal management products posted double-digit growth in the quarter, which partially offset the decline in women’s health products sales.  
Urological specialties sales were down 5%, with a 14% fall in brachytherapy sales. Revenues from StatLock catheter stabilization line (15% of total urology sales) declined 4% in the quarter.
The company’s Oncology segment reported revenue growth of 3% (up 4% in constant currency) year over year to $203.9 million, backed by higher international sales. Peripherally inserted central catheters (PICC) sales climbed 5% (impacted by softness in volume in the U.S.) while Port revenues inched up 2% in the quarter. Revenues from vascular access ultrasound products increased 3% in the reported quarter.
Sales from Surgical Specialties business were $107.7 million, flat year over year (up 2% in constant currency). Soft tissue repair business grew 2%, whereas natural tissue products sales dipped 1% in the quarter. Revenues from hernia fixation business plunged 19%, hurt by increased competition. The performance irrigation business inched down 1% while the hemostasis segment climbed up 7% in the quarter.
Gross margin was 62.3% in the reported quarter compared to 61.8% in the prior year quarter. Operating margin was 24.7% versus 25.3% in the year-ago quarter.
Marketing, selling and administrative expenses (as a percentage of sales) increased to 27.2% from 26.3% a year ago. Research and development expenses, as a percentage of sales, increased to 7.2% from 6.5%.
Balance Sheet
CR Bard ended the third quarter of 2012 with cash, restricted cash and short-term investments of $836.6 million, up 8.7% on a sequential basis. Total debt increased 6.5% sequentially to $1,293 million.
For fourth quarter 2012, CR Bard expects constant currency revenue growth in the range of 0% to 2%. For full year, the company anticipates constant currency revenues growth in the band of 3% and 4%. The company expects adjusted earnings for the fourth quarter to be in a band of $1.64 and $1.68 per share, reflecting 5 cents dilution from the Neomend acquisition. 
The current Zacks Consensus Estimates for revenue and earnings per share for full year 2012 are $2,977 million and $6.63, respectively.
Our View 
C.R. Bard’s well-diversified end markets and a vast product portfolio insulate it from fluctuations in any single therapeutic category. We expect new product launches to drive organic revenue growth and help CR Bard meet its sales objective. We are also impressed by the company’s initiative to expand into emerging markets with attractive growth opportunities.
The company recently entered into a definitive agreement to acquire privately-owned innovative surgical sealants maker, Neomend, Inc. to expand its surgical specialty product line.
However, increasing competition, fluctuating currency, pricing/volume pressure and an overall tough U.S. economy remain areas of concern. C.R. Bard faces strong competition from Boston Scientific (BSX - Free Report) , and Johnson & Johnson (JNJ - Free Report) . We currently have a Neutral recommendation on C.R. Bard. The stock currently retains a Zacks #3 Rank, which translates into a short-term “Hold” rating.

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