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10-Q
BARD C R INC /NJ/ filed this Form 10-Q on 07/25/2014
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10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

Commission File Number 1-6926

 

 

C. R. BARD, INC.

(Exact name of registrant as specified in its charter)

 

 

 

New Jersey  

730 Central Avenue

Murray Hill, New Jersey 07974

  22-1454160
(State of incorporation)  

(Address of principal

executive offices)

 

(I.R.S. Employer

Identification No.)

Registrant’s telephone number, including area code: (908) 277-8000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer    ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

   Outstanding at June 30, 2014

Common Stock - $0.25 par value

   74,635,981

 

 

 


Table of Contents

C. R. BARD, INC. AND SUBSIDIARIES

INDEX

 

         Page  

PART I – FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (unaudited)

  
 

Condensed Consolidated Statements of Operations for the Quarter and Six Months Ended June 30, 2014 and 2013

     3   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarter and Six Months Ended June 30, 2014 and 2013

     4   
 

Condensed Consolidated Balance Sheets – June 30, 2014 and December 31, 2013

     5   
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

     6   
 

Notes to Condensed Consolidated Financial Statements

     7   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     27   

Item 4.

 

Controls and Procedures

     28   

PART II – OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     29   

Item 1A.

 

Risk Factors

     32   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 5.

 

Other Information

     33   

Item 6.

 

Exhibits

     33   
Signatures        34   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

C. R. BARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands except per share amounts, unaudited)

 

     Quarter
Ended June 30,
    Six Months
Ended June 30,
 
     2014     2013     2014      2013  

Net sales

   $ 827,100      $ 759,900      $ 1,626,400       $ 1,500,200   

Costs and expenses:

         

Cost of goods sold

     320,700        296,600        630,200         591,900   

Marketing, selling and administrative expense

     245,200        226,300        482,000         442,700   

Research and development expense

     85,400        66,100        149,700         125,400   

Interest expense

     11,300        11,100        22,400         22,500   

Other (income) expense, net

     257,300        295,700        251,300         326,000   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total costs and expenses

     919,900        895,800        1,535,600         1,508,500   
  

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income from operations before income taxes

     (92,800     (135,900     90,800         (8,300

Income tax provision

     26,600        25,700        61,800         62,600   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (119,400   $ (161,600   $ 29,000       $ (70,900
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic (loss) earnings per share available to common shareholders

   $ (1.59   $ (2.03   $ 0.38       $ (0.88
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted (loss) earnings per share available to common shareholders

   $ (1.59   $ (2.03   $ 0.37       $ (0.88
  

 

 

   

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

C. R. BARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, unaudited)

 

 

     Quarter
Ended June 30,
    Six Months
Ended June 30,
 
     2014     2013     2014      2013  

Net (loss) income

   $ (119,400   $ (161,600   $ 29,000       $ (70,900

Other comprehensive income (loss):

         

Change in derivative instruments designated as cash flow hedges, net of tax

     1,300        (400     1,700         2,800   

Foreign currency translation adjustments

     2,400        (6,600     3,400         (8,700

Benefit plan adjustments, net of tax

     1,600        2,200        3,200         4,400   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     5,300        (4,800     8,300         (1,500
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive (loss) income

   $ (114,100   $ (166,400   $ 37,300       $ (72,400
  

 

 

   

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

C. R. BARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands except share and per share amounts, unaudited)

 

     June 30,
2014
    December 31,
2013
 

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 996,100      $ 1,066,900   

Restricted cash

     9,600        16,300   

Accounts receivable, less allowances of $10,800 and $11,600, respectively

     454,000        479,600   

Inventories

     374,300        356,200   

Short-term deferred tax assets

     69,500        78,200   

Other current assets

     122,300        93,200   
  

 

 

   

 

 

 

Total current assets

     2,025,800        2,090,400   
  

 

 

   

 

 

 

Property, plant and equipment, at cost

     719,800        667,500   

Less accumulated depreciation and amortization

     306,200        276,300   
  

 

 

   

 

 

 

Net property, plant and equipment

     413,600        391,200   

Goodwill

     1,101,400        1,099,500   

Core and developed technologies, net

     658,500        696,800   

Other intangible assets, net

     453,700        468,100   

Deferred tax assets

     10,800        3,900   

Other assets

     454,500        291,200   
  

 

 

   

 

 

 

Total assets

   $ 5,118,300      $ 5,041,100   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

    

Current liabilities

    

Short-term borrowings

   $ 181,500      $ —     

Accounts payable

     84,400        83,000   

Accrued expenses

     396,300        294,000   

Accrued compensation and benefits

     117,100        145,300   

Income taxes payable

     2,700        64,200   
  

 

 

   

 

 

 

Total current liabilities

     782,000        586,500   
  

 

 

   

 

 

 

Long-term debt

     1,404,100        1,405,700   

Other long-term liabilities

     1,112,600        798,800   

Deferred income taxes

     142,200        161,900   

Commitments and contingencies

    

Shareholders’ investment:

    

Preferred stock, $1 par value, authorized 5,000,000 shares; none issued

     —          —     

Common stock, $0.25 par value, authorized 600,000,000 shares; issued and outstanding 74,635,981 shares at June 30, 2014 and 77,436,263 shares at December 31, 2013

     18,700        19,400   

Capital in excess of par value

     1,840,200        1,729,600   

Accumulated deficit / retained earnings

     (168,900     360,100   

Accumulated other comprehensive loss

     (12,600     (20,900
  

 

 

   

 

 

 

Total shareholders’ investment

     1,677,400        2,088,200   
  

 

 

   

 

 

 

Total liabilities and shareholders’ investment

   $ 5,118,300      $ 5,041,100   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

C. R. BARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands, unaudited)

 

     Six Months
Ended June 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net income (loss)

   $ 29,000      $ (70,900

Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of acquired business:

    

Depreciation and amortization

     85,000        70,600   

Litigation charges, net

     262,700        318,200   

Gain on sale of investment

     (7,100     —     

Asset impairments

     600        8,900   

Restructuring

     —          (1,400

Acquired in-process research and development

     —          500   

Deferred income taxes

     (19,500     (14,000

Share-based compensation

     36,700        28,500   

Inventory reserves and provision for doubtful accounts

     10,400        10,800   

Other items

     1,100        1,200   

Changes in assets and liabilities:

    

Accounts receivable

     31,000        (7,600

Inventories

     (27,900     (23,100

Current liabilities

     (3,900     (94,000

Taxes

     (112,800     2,300   

Other, net

     (1,300     (14,300
  

 

 

   

 

 

 

Net cash provided by operating activities

     284,000        215,700   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (55,600     (30,600

Change in restricted cash

     6,700        16,100   

Payments made for purchase of business, net of cash acquired

     —          (3,000

Payments made for intangibles

     (400     (3,500

Proceeds from sale of investment

     7,100        —     

Other

     —          2,300   
  

 

 

   

 

 

 

Net cash used in investing activities

     (42,200     (18,700
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Change in short-term borrowings, net

     181,500        76,500   

Proceeds from exercises under share-based compensation plans, net

     49,600        33,700   

Excess tax benefit relating to share-based compensation plans

     13,500        4,900   

Purchases of common stock

     (526,100     (309,800

Dividends paid

     (32,700     (32,900

Other

     (200     —     
  

 

 

   

 

 

 

Net cash used in financing activities

     (314,400     (227,600
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1,800        (6,300
  

 

 

   

 

 

 

Decrease in cash and cash equivalents during the period

     (70,800     (36,900
  

 

 

   

 

 

 

Balance at January 1

     1,066,900        896,300   
  

 

 

   

 

 

 

Balance at June 30

   $ 996,100      $ 859,400   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for:

    

Interest

   $ 21,300      $ 18,900   

Income taxes

     180,600        69,400   

Non-cash transactions:

    

Dividends declared, not paid

     16,700        17,000   

Purchase of common stock not settled

     —          19,700   

Purchase of business and related costs

     —          1,300   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of C. R. Bard, Inc. and its subsidiaries (the “company” or “Bard”) should be read in conjunction with the audited consolidated financial statements and notes thereto included in Bard’s 2013 Annual Report on Form 10-K. These financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in the financial statements in Bard’s 2013 Annual Report on Form 10-K. The preparation of these financial statements requires the company to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities at the date of the financial statements. These financial statements include all normal and recurring adjustments necessary for a fair presentation. The accounts of most foreign subsidiaries are consolidated as of and for the quarters and six months ended May 31, 2014 and May 31, 2013 and as of November 30, 2013. No events occurred related to these foreign subsidiaries during the months of June 2014, June 2013 or December 2013 that materially affected the financial position or results of operations of the company. The results for the interim periods presented are not necessarily indicative of the results expected for the year.

New Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board issued a new accounting standard that provides for a comprehensive model to use in the accounting for revenue arising from contracts with customers that will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles. Under this standard, revenue will be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard will be effective as of the beginning of Bard’s 2017 fiscal year. The company is assessing the new standard and has not yet determined the impact to the consolidated financial statements.

2. Earnings per Common Share

Earnings per share (“EPS”) is computed under the two-class method using the following common share information:

 

     Quarter Ended
June 30,
    Six Months
Ended June 30,
 
     2014     2013     2014      2013  

(dollars and shares in millions)

         

EPS Numerator:

         

Net (loss) income

   $ (119.4   $ (161.6   $ 29.0       $ (70.9

Less: Income allocated to participating securities

     —          —          0.4         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income available to common shareholders

   $ (119.4   $ (161.6   $ 28.6       $ (70.9
  

 

 

   

 

 

   

 

 

    

 

 

 

EPS Denominator:

         

Weighted average common shares outstanding

     75.1        79.8        76.0         80.6   

Dilutive common share equivalents from share-based compensation plans

     —          —          1.5         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average common and common equivalent shares outstanding, assuming dilution

     75.1        79.8        77.5         80.6   
  

 

 

   

 

 

   

 

 

    

 

 

 

For the quarter ended June 30, 2014, approximately 1.5 million common share equivalents were not included in the computation of diluted weighted average shares outstanding. For both the quarter and six months ended June 30, 2013, approximately 1.3 million common share equivalents were not included in the computation of diluted weighted average shares outstanding. Common share equivalents primarily from share-based compensation plans were not included in each of these periods because their effect would have been anti-dilutive.

3. Income Taxes

The effective tax rate for both the quarter and six months ended June 30, 2014 and 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 also reflected a tax benefit of $10.9 million as a result of the completion of U.S. Internal Revenue Service (“IRS”) examinations for the tax years 2008 through 2010. The effective tax rate for the six months ended June 30, 2013 reflected the discrete tax effect of a write-down of an insurance receivable, which was also incurred in a low tax jurisdiction. See Note 6 of the notes to condensed consolidated financial statements. In addition, the tax provision for the six months ended June 30, 2013 was reduced by approximately $3.7 million to recognize

 

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Table of Contents

C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

the 2012 benefit of the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013 and retroactively reinstated the research tax credit. At June 30, 2014, the total amount of liability for unrecognized tax benefits related to federal, state and foreign taxes was $31.5 million (of which $26.0 million would impact the effective tax rate, if recognized) plus $3.2 million of accrued interest. At December 31, 2013, the liability for unrecognized tax benefits was $58.0 million plus $6.6 million of accrued interest. Depending upon the result of open tax examinations and/or the expiration of applicable statutes of limitation, the company believes it is reasonably possible that the total amount of unrecognized tax benefits may decrease by up to $3.7 million within the next 12 months.

4. Financial Instruments

Foreign Exchange Derivative Instruments

The company enters into readily marketable forward and option contracts with financial institutions to help reduce its exposure to foreign currency exchange rate fluctuations. These contracts limit volatility because gains and losses associated with foreign currency exchange rate movements are generally offset by movements in the underlying hedged item. The notional value of the company’s forward currency and option currency contracts was $271.4 million and $148.9 million at June 30, 2014 and December 31, 2013, respectively. For further discussion regarding the company’s use of derivative instruments, see Note 1 of the notes to consolidated financial statements in Bard’s 2013 Annual Report on Form 10-K.

Interest Rate Derivative Instrument

The company’s outstanding interest rate swap contract effectively converts its 2.875% fixed-rate notes due 2016 to a floating-rate instrument. The notional value of the company’s interest rate swap contract is $250.0 million.

The location and fair value of derivative instruments that are designated as hedging instruments recognized in the condensed consolidated balance sheets are as follows:

 

     Balance Sheet
Location
   Fair Value
of Derivatives
 

Derivatives Designated as Hedging Instruments

      June 30,
2014
     December 31,
2013
 
(dollars in millions)                   

Forward currency contracts

   Other current assets    $ 1.7       $ 1.2   

Option currency contracts

   Other current assets      1.9         1.3   

Forward currency contracts

   Other assets      0.4         —     

Option currency contracts

   Other assets      1.9         —     

Interest rate swap contract

   Other assets      7.0         8.9   
     

 

 

    

 

 

 
      $ 12.9       $ 11.4   
     

 

 

    

 

 

 

Forward currency contracts

   Accrued expenses    $ 0.7       $ 0.5   

Forward currency contracts

   Other long-term liabilities      0.1         —     
     

 

 

    

 

 

 
      $ 0.8       $ 0.5   
     

 

 

    

 

 

 

The location and amounts of gains and losses on derivative instruments designated as cash flow hedges and the impact on shareholders’ investment are as follows:

 

     Gain/(Loss)
Recognized in Other
Comprehensive
Income (Loss)
    Location of
Gain/(Loss) Reclassified
from Accumulated
Other Comprehensive Loss to
Income
   Gain/(Loss) Reclassified
from Accumulated
Other Comprehensive Loss
into Income
 
     Quarter Ended
June 30,
       Quarter Ended
June 30,
 
     2014      2013        2014     2013  
(dollars in millions)                               

Forward currency contracts

   $ 0.6       $ (0.2   Cost of goods sold    $ 0.2      $ 0.4   

Option currency contracts

     0.6         0.4      Cost of goods sold      (0.4     (0.2
  

 

 

    

 

 

      

 

 

   

 

 

 
   $ 1.2       $ 0.2         $ (0.2   $ 0.2   
  

 

 

    

 

 

      

 

 

   

 

 

 

 

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Table of Contents

C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Gain/(Loss)
Recognized in Other
Comprehensive
Income (Loss)
     Location of
Gain/(Loss) Reclassified
from Accumulated
Other Comprehensive Loss to
Income
   Gain/(Loss) Reclassified
from Accumulated
Other Comprehensive Loss
into Income
 
     Six Months Ended
June 30,
        Six Months Ended
June 30,
 
     2014      2013         2014     2013  
(dollars in millions)                                

Forward currency contracts

   $ 0.9       $ 4.6       Cost of goods sold    $ 0.8      $ —     

Option currency contracts

             0.1       Cost of goods sold      (1.0     (0.5
  

 

 

    

 

 

       

 

 

   

 

 

 
   $ 0.9       $ 4.7          $ (0.2   $ (0.5
  

 

 

    

 

 

       

 

 

   

 

 

 

The location and amounts of gains and losses on the derivative instrument designated as a fair value hedge are as follows:

 

     Location in
Statement of
Operations
     (Loss)/Gain Recognized on Swap     Gain/(Loss) Recognized on Long-Term Debt  
        Quarter Ended
June 30,
    Six Months Ended
June 30,
    Quarter Ended
June 30,
     Six Months Ended
June 30,
 
        2014     2013     2014     2013     2014      2013      2014      2013  

(dollars in millions)

                      

Interest rate swap contract

     Interest expense       $ (0.9   $ (2.1   $ (1.9   $ (3.2   $ 0.9       $ 2.1       $ 1.9       $ 3.2   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Financial Instruments Measured at Fair Value on a Recurring Basis

Fair value is defined as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that is determined using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy range from Level 1 having observable inputs to Level 3 having unobservable inputs.

The following table summarizes certain financial instrument assets measured at fair value on a recurring basis:

 

     June 30,
2014
     December 31,
2013
 
(dollars in millions)              

Forward currency contracts

   $ 1.3       $ 0.7   

Option currency contracts

     3.8         1.3   

Interest rate swap contract

     7.0         8.9   

The fair values were measured using significant other observable inputs and valued by reference to similar financial instruments, adjusted for restrictions and other terms specific to each instrument. These financial instruments are categorized as Level 2 under the fair value hierarchy.

The fair value of the liability for contingent consideration related to acquisitions was $117.7 million, of which $104.8 million was recorded to accrued expenses, and $95.7 million, of which $10.3 million was recorded to accrued expenses, at June 30, 2014 and December 31, 2013, respectively. The increase in the fair value of the liability for contingent consideration is primarily due to an increase in the probability of a regulatory-based milestone payment related to the Lutonix, Inc. acquisition. The fair value was measured using significant unobservable inputs and is categorized as Level 3 under the fair value hierarchy.

Financial Instruments not Measured at Fair Value

The company maintains a $750 million five-year committed syndicated bank credit facility that expires in September 2018. 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 June 30, 2014 the company was in compliance with this covenant. The fair value of commercial paper borrowings of $181.5 million at June 30, 2014 approximated its carrying value. There were no commercial paper borrowings outstanding at December 31, 2013.

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The estimated fair value of long-term debt including the effect of the related interest rate swap contract was approximately $1,483.2 million and $1,435.4 million at June 30, 2014 and December 31, 2013, respectively. The fair value was estimated using dealer quotes for similarly-rated debt instruments over the remaining contractual term of the company’s obligation. Long-term debt is categorized as Level 2 under the fair value hierarchy.

Concentration Risk

Accounts receivable balances include sales to government-supported healthcare systems outside the United States. The company continues to monitor sovereign debt issues and economic conditions in Europe and evaluates accounts receivable in certain countries for potential collection risks. Economic conditions and other factors in certain countries in Europe have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect these accounts receivable and may require the company to re-evaluate the collectability of these receivables in future periods. The company has experienced significant delays in the collection of accounts receivable associated with the national healthcare systems in Spain, Italy, Greece and Portugal. At June 30, 2014, the company’s accounts receivable, net of allowances, from the national healthcare systems in these countries and amounts past due greater than 365 days are as follows:

 

 

     Accounts
Receivable, net
     Greater than
365 Days Past Due
 
(dollars in millions)              

Spain

   $ 11.2       $ 0.1   

Italy

     17.5         2.1   

Greece

     9.8         4.1   

Portugal

     3.6         1.3   
  

 

 

    

 

 

 
   $ 42.1       $ 7.6   
  

 

 

    

 

 

 

5. Inventories

Inventories consisted of:

 

     June 30,
2014
     December 31,
2013
 
(dollars in millions)              

Finished goods

   $ 225.6       $ 218.3   

Work in process

     25.5         21.9   

Raw materials

     123.2         116.0   
  

 

 

    

 

 

 
   $ 374.3       $ 356.2   
  

 

 

    

 

 

 

6. Contingencies

General

In the ordinary course of business, the company is subject to various legal proceedings, investigations and claims, including, for example, environmental matters, employment disputes, disputes on agreements and other commercial disputes. In addition, the company operates in an industry susceptible to significant product liability and patent legal claims. The company accounts for estimated losses with respect to legal proceedings and claims when such losses are probable and reasonably estimable. If the estimate of a probable loss is a range and no amount within the range is more likely, the company accrues the minimum amount of the range. Legal costs associated with these matters are expensed as incurred. 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. If a third party’s patent infringement claim were to be determined against the company, the company might be required to make significant royalty or other payments or might be subject to an injunction or other limitation on its ability to manufacture or distribute one or more products. If a patent owned by or licensed to the company is found to be invalid or unenforceable, the company might be required to reduce the value of certain intangible assets on the company’s balance sheet and to record a corresponding charge, which could be significant in amount. Many of the company’s legal proceedings and claims could have a material adverse effect on its business, results of operations, financial condition and/or liquidity.

 

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Product Liability Matters

As of July 7, 2014, approximately 220 federal and 105 state lawsuits involving individual claims by approximately 325 plaintiffs, as well as two putative class actions in the United States are currently pending against the company with respect to its Composix® Kugel® and certain other hernia repair implant products (collectively, the “Hernia Product Claims”). The company voluntarily recalled certain sizes and lots of the Composix® Kugel® products beginning in December 2005. One of the U.S. putative class action lawsuits consolidated ten previously-filed U.S. class action lawsuits. The putative class actions, none of which has been certified, seek: (i) medical monitoring; (ii) compensatory damages; (iii) punitive damages; (iv) a judicial finding of defect and causation; and/or (v) attorneys’ fees. In the third quarter of 2013, a settlement was reached with respect to the three pending putative Canadian class actions within amounts previously recorded by the company and were fully resolved in April 2014. Approximately 85 of the state lawsuits, involving individual claims by approximately 85 plaintiffs, are pending in the Superior Court of the State of Rhode Island, with the remainder in various other jurisdictions. The Hernia Product Claims also generally seek damages for personal injury resulting from use of the products.

In June 2007, the Composix® Kugel® lawsuits and, subsequently, other hernia repair product lawsuits, pending in federal courts nationwide were transferred into one Multidistrict Litigation (“MDL”) for coordinated pre-trial proceedings in the United States District Court for the District of Rhode Island.

On June 30, 2011, the company announced that it had reached agreements in principle with various plaintiffs’ law firms to settle the majority of its existing Hernia Product Claims. Each agreement was subject to certain conditions, including requirements for participation in the proposed settlements by a certain minimum number of plaintiffs. In addition, the company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Hernia Product Claims, and intends to vigorously defend Hernia Product Claims that do not settle, including through litigation. The company cannot give any assurances that the resolution of the Hernia Product Claims that have not settled, including asserted and unasserted claims and the putative class action lawsuits, will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

As of July 7, 2014, product liability lawsuits involving individual claims by approximately 12,445 plaintiffs have been filed or asserted against the company in various federal and state jurisdictions alleging personal injuries associated with the use of certain of the company’s surgical continence products for women, including its Avaulta® line of products. In addition, five putative class actions in the United States and four putative class actions in Canada have been filed against the company (all lawsuits, collectively, the “Women’s Health Product Claims”). The Women’s Health Product Claims generally seek damages for personal injury resulting from use of the products. The putative class actions, none of which has been certified, seek: (i) medical monitoring; (ii) compensatory damages; (iii) punitive damages; (iv) a judicial finding of defect and causation; and/or (v) attorneys’ fees. With respect to approximately half of the filed and asserted Women’s Health Product Claims, the company believes that one of its suppliers has an obligation to defend and indemnify the company with respect to any product defect liability.

In October 2010, the Women’s Health Product Claims involving solely Avaulta® products pending in federal courts nationwide were transferred into an MDL in the United States District Court for the Southern District of West Virginia (the “District Court”), the scope of which was later expanded to include lawsuits involving all women’s surgical continence products that are manufactured or distributed by the company. The first trial in a state court was completed in July 2012 and resulted in a judgment against the company of approximately $3.6 million. The company has appealed this decision. The first trial in the MDL commenced in July 2013 and resulted in a judgment against the company of approximately $2 million. The company intends to appeal the judgment. During the third quarter of 2013, the company settled one MDL case and one New Jersey state case. In addition, during the third quarter of 2013, one MDL case was voluntarily dismissed with prejudice. On January 16, 2014, the District Court ordered that the company prepare 200 individual cases for trial (the “WHP Pre-Trial Order”) (the timing for which is currently unknown), which has resulted in additional cost in the second quarter of 2014, and is expected to result in material additional cost in 2014 in defending Women’s Health Product Claims. The District Court may order that the company prepare additional cases for trial, which could result in material additional costs in future periods. During the second quarter of 2014, the company reached an agreement with two plaintiffs’ law firms to settle their inventory of cases, representing more than 500 of the filed or asserted Women’s Health Product Claims, which the company believes are not the subject of its supplier’s indemnification obligation. The company also settled one MDL case that was originally scheduled for trial in May 2014. In addition, the company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Women’s Health Product Claims, which may include additional inventory settlements. While no MDL trials are scheduled for the remainder of 2014, the company anticipates that multiple additional trials, including a possible consolidated trial, may occur in early 2015. Additional state court trials are scheduled throughout the second half of 2014.

 

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The company does not believe that any verdicts entered to date are representative of potential outcomes of all Women’s Health Product Claims. The case numbers set forth above do not include approximately 1,020 generic complaints involving women’s health products where the company cannot, based on the allegations in the complaints, determine whether any of those cases involves the company’s women’s health products. In addition, the case numbers set forth above do not include approximately 2,115 claims that have been threatened against the company but for which complaints have not yet been filed. While the company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Women’s Health Product Claims and intends to vigorously defend the Women’s Health Product Claims that do not settle, including through litigation, it cannot give any assurances that the resolution of these claims will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

As of July 7, 2014, product liability lawsuits involving individual claims by 50 plaintiffs are currently pending against the company in various federal and state jurisdictions alleging personal injuries associated with the use of the company’s vena cava filter products. In addition, three putative class actions were filed against the company in various state courts on behalf of plaintiffs who are alleged to have no present injury (all lawsuits, collectively, the “Filter Product Claims”). Two of these putative class actions were dismissed during the second quarter of 2013, and class certification was denied for the third putative class action in July 2013. The first Filter Product Claim trial was completed in June 2012 and resulted in a judgment for the company. The company expects additional trials of Filter Product Claims to take place over the next 12 months. During the second quarter of 2013, the company finalized settlement agreements with respect to more than 30 Filter Product Claims and made payments with respect to such claims within the amounts previously recorded. The case numbers set forth above do not include approximately 165 claims that have been threatened against the company but for which complaints have not yet been filed. While the company intends to vigorously defend the remaining unsettled Filter Product Claims, it cannot give any assurances that the resolution of these claims will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

In most product liability litigations of this nature, plaintiffs allege a wide variety of claims, ranging from allegations of serious injury caused by the products to efforts to obtain compensation notwithstanding the absence of any injury. In many of these cases, the company has not yet received and reviewed complete information regarding the plaintiffs and their medical conditions and, consequently, is unable to fully evaluate the claims. The company expects that it will receive and review additional information regarding any remaining unsettled product liability matters.

The company believes that some settlements and judgments, as well as some legal defense costs, relating to product liability matters are or may be covered in whole or in part under its product liability insurance policies with a limited number of insurance carriers, or, in some circumstances, indemnification obligations to the company from other parties. In certain circumstances, insurance carriers reserve their rights with respect to coverage, or contest or deny coverage, as has occurred with respect to certain claims. When this occurs, the company intends to vigorously contest disputes with respect to its insurance coverage and to enforce its rights under the terms of its insurance policies, and accordingly, will record receivables with respect to amounts due under these policies, when recovery is probable. Amounts recovered under the company’s product liability insurance policies or indemnification arrangements may be less than the stated coverage limits or less than otherwise expected and may not be adequate to cover damages and/or costs relating to claims. In addition, there is no guarantee that insurers or other parties will pay claims or that coverage or indemnity will be otherwise available.

The company’s insurance coverage with respect to the Hernia Product Claims has been exhausted. In the first quarter of 2013 the company recorded a non-cash charge of $25.0 million ($24.5 million after tax) to other (income) expense, net, for the write-down of an insurance receivable related to a dispute with one of its excess insurance carriers in connection with these claims.

Other Legal Matters

Since early 2013, the company has received subpoenas or Civil Investigative Demands from a number of State Attorneys General seeking information related to the sales and marketing of certain of the company’s products that are the subject of the Hernia Product Claims and the Women’s Health Product Claims. The company is cooperating with these requests. Since it is not feasible to predict the outcome of these proceedings, the company cannot give any assurances that the resolution of these proceedings will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

In December 2007, a U.S. District Court jury in Arizona found that certain of W.L. Gore & Associates Inc.’s (“Gore”) ePTFE vascular grafts and stent-grafts infringe the company’s patent number 6,436,135 (the “135 patent”). The jury upheld the validity of the patent and awarded the company $185 million in past damages. The jury also found that Gore willfully infringed the patent. In a second phase of the trial, the District Court ruled that Gore failed to prove that the patent is unenforceable due to inequitable conduct. In March 2009, the District Court doubled the jury award to approximately $371

 

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million for damages through June 2007. The District Court also awarded the company attorneys’ fees of $19 million and prejudgment interest of approximately $20 million. In addition, the District Court denied Gore’s remaining motions, including its motions for a new trial and to set aside the jury’s verdict. In July 2010, the District Court awarded the company approximately $109 million in additional damages for the period from July 2007 through March 2009. The District Court also assessed a royalty rate of between 12.5% and 20%, depending on the product, that will be used to calculate damages for Gore’s infringing sales from April 2009 through the expiration of the patent.

Gore appealed this matter to the Court of Appeals for the Federal Circuit (the “Court of Appeals”), which on February 10, 2012 affirmed the decision of the District Court. Gore filed a petition with the Court of Appeals for a rehearing of its appeal. On June 14, 2012, the Court of Appeals reaffirmed its February 10, 2012 decision, including the ongoing royalty rates as set by the District Court, with the exception of the issue of willfulness with respect to Gore’s infringement of the 135 patent, which was remanded to the District Court for further consideration. On October 12, 2012, Gore filed a petition for a writ of certiorari to the U.S. Supreme Court requesting a review of the portion of the decision that the Court of Appeals reaffirmed. The U.S. Supreme Court denied Gore’s petition on January 14, 2013.

On January 28, 2013, Gore filed with the U.S. District Court a Request for Judicial Notice that the U.S. Patent and Trademark Office (“USPTO”) granted Gore’s previously filed request for a re-examination of the 135 patent. On April 1, 2013, the USPTO issued a First Office Action initially rejecting all of the claims of the 135 patent that are the subject of the re-examination. On July 10, 2013, the USPTO issued a Notice of Intent to Issue an Ex Parte Reexamination Certificate upholding the patentability of all re-examined claims of the 135 patent. This action terminated the re-examination proceeding and upheld the claims involved in the re-examination.

On remand of the action from the Court of Appeals, the District Court heard oral argument on June 5, 2013 on three motions pending before it – Gore’s motion requesting a determination that Gore’s infringement was not willful, Gore’s motion for a new trial, and the company’s motion to execute on the judgment with respect to all amounts other than enhanced damages due to willfulness. On October 16, 2013, the District Court denied Gore’s motion for entry of a judgment holding that Gore’s infringement was not willful and Gore’s motion for a new trial. The District Court granted the company’s motion to execute on the judgment, holding that all aspects of the judgment relating to infringement were “final and non-appealable.” The District Court continued its stay on the execution of the judgment with respect to willfulness and the related enhanced damages.

On November 1, 2013, Gore paid to the company $894.3 million in cash (the “Gore Proceeds”), the total amount of the compensatory damages for infringement, including pre- and post-judgment interest, and the royalties accrued through September 30, 2013. Gore expressly reserved its right to appeal from the District Court’s rulings and notified the company that, if successful on appeal, it would seek to recover the amounts paid to the company. On December 5, 2013, Gore filed an appeal in the Court of Appeals on all of the District Court’s rulings, including the order denying Gore’s motion for a new trial. The Court of Appeals is scheduled to hear oral argument on Gore’s appeal of the District Court’s rulings on August 8, 2014.

In the fourth quarter of 2013, the company recorded a gain of $894.3 million ($557.4 million after tax) to other (income) expense, net, based on the District Court’s October 2013 rulings and the company’s receipt of the Gore Proceeds. In addition, the company received $37.6 million from Gore in April 2014 representing Gore’s calculation of royalties for its infringing sales for the quarter ended March 31, 2014. This royalty payment was recorded to revenue in the second quarter of 2014. Royalty payments of $75.2 million were recorded to revenue for the six months ended June 30, 2014. The company has received cumulative proceeds from Gore of $969.5 million. The company has concluded that the chance of Gore establishing its right to recover this cash is remote. The company continues to account for the enhanced damages awarded by the District Court due to Gore’s willfulness as a contingent gain.

The timing of final resolution of this litigation remains uncertain. The company cannot give any assurances that royalties for Gore’s future infringing sales will remain at or near historic levels.

The company is subject to numerous federal, state, local and foreign environmental protection laws governing, among other things, the generation, storage, use and transportation of hazardous materials and emissions or discharges into the ground, air or water. The company is or may become a party to proceedings brought under various federal laws including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly known as Superfund, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act and similar state or foreign laws. These proceedings seek to require the owners or operators of contaminated sites, transporters of hazardous materials to the sites and generators of hazardous materials disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. In most cases, there are other potentially responsible parties that may be liable for remediation costs. In these cases, the government alleges that the defendants are jointly and severally liable for the cleanup costs; however, these proceedings are

 

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frequently resolved so that the allocation of cleanup costs among the parties more closely reflects the relative contributions of the parties to the site contamination. The company’s potential liability varies greatly from site to site. For some sites, the potential liability is de minimis and for others the costs of cleanup have not yet been determined. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study and are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The company believes that the proceedings and claims described above will likely be resolved over an extended period of time. While it is not feasible to predict the outcome of these proceedings, based upon the company’s experience, current information and applicable law, the company does not expect these proceedings to have a material adverse effect on its financial condition and/or liquidity. However, one or more of the proceedings could be material to the company’s business and/or results of operations.

Litigation Reserves

The company regularly monitors and evaluates the status of product liability and other legal matters, and may, from time-to-time, engage in settlement and mediation discussions taking into consideration developments in the matters and the risks and uncertainties surrounding litigation. These discussions could result in settlements of one or more of these claims at any time.

In the second quarter of 2013, the company recorded a charge, net of estimated recoveries to other (income) expense, net, of approximately $293.0 million ($276.0 million after tax) related to certain of the product liability matters discussed above under the heading “Product Liability Matters”. The company recorded this charge after evaluating these matters based on information then currently available, including but not limited to: 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. In the fourth quarter of 2013, based on information then available regarding these and other factors, including but not limited to: the increase in the number of claims; the estimate of unasserted claims; the settlement of claims both by the company and by other manufacturers subject to product liability claims with respect to similar products; and settlements subject to negotiation during the quarter, the company recorded an additional charge, net of estimated recoveries, of approximately $108.0 million ($92.0 million after tax).

In the second quarter of 2014, the company recorded an additional charge related to these matters, net of estimated recoveries to other (income) expense, net, of approximately $259.0 million ($236.0 million after tax). The company recorded this charge based on additional information obtained during the quarter, including with respect to the factors noted above. Specifically, the company considered its discussions with plaintiffs’ counsel, the increase in the rate of claims being filed (which led the company to increase its estimate of unasserted claims), and the value, number of cases and nature of the inventory of cases with respect to the recent settlements of claims by the company and other manufacturers.

These charges recognized the estimated costs for the product liability matters discussed above, including (with respect to such matters) asserted and unasserted claims, and costs to administer the settlements related to such matters. These charges exclude any costs associated with the putative class action lawsuits.

The company cannot give any assurances that the actual costs incurred with respect to these product liability matters will not exceed the related amounts accrued. With respect to product liability claims that are not resolved through settlement, the company intends to vigorously defend against such claims, including through litigation. The company cannot give any assurances that the resolution of any of its product liability matters, including asserted and unasserted claims and the putative class action lawsuits, will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

Accruals for product liability and other legal matters amounted to $1,076.1 million, of which $136.8 million was recorded to accrued expenses, and $662.4 million, of which $117.5 million was recorded to accrued expenses, at June 30, 2014 and December 31, 2013, respectively. The company made total payments of $177.1 million to qualified settlement funds (“QSFs”), subject to certain settlement conditions, for certain product liability matters. No payments were made to qualified settlement funds during the six months ended June 30, 2014. Payments to QSFs are recorded as a component of restricted cash. Total payments of $167.5 million from these QSFs have been made to qualified claimants, of which $6.7 million were made during the six months ended June 30, 2014. In addition, other payments of $33.2 million have been made to qualified claimants, of which $3.8 million were made during the six months ended June 30, 2014.

The company recorded receivables related to product liability matters amounting to $381.3 million and $234.9 million at June 30, 2014 and December 31, 2013, respectively. A substantial amount of the receivable at June 30, 2014 and

 

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December 31, 2013 is the subject of a dispute with a supplier who has contested, at least in part, its obligation to defend and indemnify the company, which the company refutes. Approximately half of the filed and asserted Women’s Health Product Claims relate to certain products distributed by the company under agreements with two separate subsidiaries of the supplier. These agreements include indemnification provisions pursuant to which the company is indemnified by the supplier for any liabilities of the company arising from product liability claims relating to any alleged product defect, one of the theories on which the Women’s Health Product Claims are based. The company engaged outside counsel to evaluate the company’s rights with respect to the dispute, and outside counsel issued a legal opinion supporting the company’s belief regarding the supplier’s obligation to defend and indemnify the company for product defect claims with respect to the products manufactured by the supplier that are the subject of the Women’s Health Product Claims. At this time, no litigation has been filed with respect to the dispute with the supplier. After considering the following factors (as appropriate): the nature of the claims; relevant contracts; relevant factual and legal issues; the advice and judgment of outside legal counsel, including a legal opinion; the creditworthiness of the supplier; and other pertinent factors, the company believes that collectability of these receivables is probable.

The company is unable to estimate the reasonably possible losses or range of losses, if any, arising from certain existing product liability matters and other legal matters. Under U.S. generally accepted accounting principles, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight”. With respect to all putative class action lawsuits relating to product liability matters, the company is unable to estimate a range of reasonably possible losses for the following reasons: (i) all or certain of the proceedings are in early stages; (ii) the company has not received and reviewed complete information regarding all or certain of the plaintiffs and their medical conditions; and/or (iii) there are significant factual issues to be resolved. In addition, there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class. In addition, with respect to the Civil Investigative Demands from a number of State Attorneys General, the company is unable to estimate a range of reasonably possible losses for the following reasons: (i) all or certain of the proceedings are in early stages; and/or (ii) there are significant factual issues to be resolved.

7. Share-Based Compensation Plans

The company may grant a variety of share-based payments under the 2012 Long Term Incentive Plan of C. R. Bard, Inc., as amended and restated (the “LTIP”) and the 2005 Directors’ Stock Award Plan of C. R. Bard, Inc., as amended and restated (the “Directors’ Plan”) to certain directors, officers and employees. At the company’s Annual Meeting of Shareholders on April 16, 2014, the shareholders authorized an additional 2,900,000 shares for issuance under the LTIP. The total number of remaining shares at June 30, 2014 that may be issued under the LTIP was 6,510,679 and under the Directors’ Plan was 35,707. Awards under the LTIP may be in the form of stock options, stock appreciation rights, limited stock appreciation rights, restricted stock, unrestricted stock and other stock-based awards. Awards under the Directors’ Plan may be in the form of stock awards, stock options or stock appreciation rights. The company also has two employee stock purchase programs.

For the quarters ended June 30, 2014 and 2013, amounts charged against income for share-based payment arrangements was $17.2 million and $12.7 million, respectively. For the six months ended June 30, 2014 and 2013, amounts charged against income for share-based payment arrangements was $36.7 million and $28.5 million, respectively.

In the first quarter of each of 2014 and 2013, the company granted performance restricted stock units to certain officers. These units have requisite service periods of three years and have no dividend rights. The actual payout of these units varies based on the company’s performance over the three-year period based on pre-established targets over the period and a market condition modifier based on total shareholder return (“TSR”) compared to an industry peer group. The actual payout under these awards may exceed an officer’s target payout; however, compensation cost initially recognized assumes that the target payout level will be achieved and may be adjusted for subsequent changes in the expected outcome of the performance-related condition. The fair values of these units are based on the market price of the company’s stock on the date of the grant and use a Monte Carlo simulation model for the TSR component. The fair values of the TSR components of the 2014 and 2013 grants were estimated based on the following assumptions: risk-free interest rate of 0.70% and 0.42%, respectively; dividend yield of 0.62% and 0.81%, respectively; and expected life of 2.88 years for both valuations.

As of June 30, 2014, there were $91.9 million of unrecognized compensation expenses related to share-based payment arrangements. These costs are expected to be recognized over a weighted-average period of approximately three years. The company has sufficient shares to satisfy expected share-based payment arrangements in 2014.

 

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8. Pension Plans

The company has both tax-qualified and nonqualified, noncontributory defined benefit pension plans, that together cover certain domestic and foreign employees. These plans provide benefits based upon a participant’s compensation and years of service.

The components of net periodic pension cost are as follows:

 

     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
(dollars in millions)             

Service cost, net of employee contributions

   $ 6.8      $ 7.6      $ 13.5      $ 15.1   

Interest cost

     5.2        4.5        10.5        9.1   

Expected return on plan assets

     (6.8     (6.5     (13.6     (13.0

Amortization

     2.5        3.4        4.9        6.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 7.7      $ 9.0      $ 15.3      $ 18.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

9. Shareholders’ Investment

The company repurchased approximately 3.7 million shares of common stock for $526.1 million in the six months ended June 30, 2014 under its previously announced share repurchase authorizations.

Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component are as follows:

 

    Derivative
Instruments
Designated as
Cash Flow Hedges
    Foreign Currency
Translation
    Benefit
Plans
    Total  
(dollars in millions)            

Balance at December 31, 2012

  $ (0.7   $ 32.6      $ (113.1   $ (81.2

Other comprehensive income (loss) before reclassifications

    3.0        (8.7     —          (5.7

Tax (provision) benefit related to other comprehensive income (loss) before reclassifications(a)

    (0.5     —          —          (0.5
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications, net of taxes

    2.5        (8.7     —          (6.2
 

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

    0.5 (b)      —          6.8 (c)      7.3   

Tax provision (benefit) related to amounts reclassified from accumulated other comprehensive income (loss)

    (0.2     —          (2.4     (2.6
 

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications, net of tax

    0.3        —          4.4        4.7   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    2.8        (8.7     4.4        (1.5
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

  $ 2.1      $ 23.9      $ (108.7   $ (82.7
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  $ —        $ 47.3      $ (68.2   $ (20.9

Other comprehensive income (loss) before reclassifications

    1.6        3.4        —          5.0   

Tax (provision) benefit related to other comprehensive income (loss) before reclassifications(a)

    0.4        —          —          0.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications, net of taxes

    2.0        3.4        —          5.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

    Derivative
Instruments
Designated as
Cash Flow Hedges
    Foreign Currency
Translation
    Benefit
Plans
    Total  
(dollars in millions)            

Amounts reclassified from accumulated other comprehensive income (loss)

    0.2 (b)      —          4.9 (c)      5.1   

Tax provision (benefit) related to amounts reclassified from accumulated other comprehensive income (loss)

    (0.5     —          (1.7     (2.2

Reclassifications, net of tax

    (0.3     —          3.2        2.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    1.7        3.4        3.2        8.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $ 1.7      $ 50.7      $ (65.0   $ (12.6
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Income taxes are not provided for foreign currency translation adjustment.
(b) See Note 4 of the notes to condensed consolidated financial statements.
(c) These components are included in the computation of net periodic pension cost. See Note 8 of the notes to condensed consolidated financial statements.

10. Segment Information

The company’s management considers its business to be a single segment entity–the manufacture and sale of medical devices. The company’s products generally share similar distribution channels and customers. 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. In general, the company’s products are intended to be used once and then discarded or either temporarily or permanently implanted. The company’s chief operating decision makers evaluate their various global product portfolios on a net sales basis and generally evaluate profitability and associated investment on an enterprise-wide basis due to shared geographic infrastructures.

Net sales based on the location of external customers by geographic region are:

 

     Quarter Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  
(dollars in millions)                            

United States

   $ 555.1       $ 497.6       $ 1,106.5       $ 996.1   

Europe(a)

     126.4         120.0         246.5         234.1   

Japan

     42.3         40.0         81.2         80.0   

Other(a)

     103.3         102.3         192.2         190.0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 827.1       $ 759.9       $ 1,626.4       $ 1,500.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Beginning in 2014, certain emerging markets in Europe are included in the “other” geographic region. Prior year amounts have been reclassified to conform to the current year presentation.

Total net sales by product group category are:

 

     Quarter Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  
(dollars in millions)                            

Vascular

   $ 233.0       $ 212.2       $ 452.2       $ 415.4   

Urology

     207.1         191.7         408.5         380.5   

Oncology

     224.7         214.1         443.7         421.2   

Surgical Specialties

     139.3         120.0         274.5         240.3   

Other

     23.0         21.9         47.5         42.8   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 827.1       $ 759.9       $ 1,626.4       $ 1,500.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 2013 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, Latin America, and Europe 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, 2014, the company’s research and development (“R&D”) expense as a percentage of net sales was 9.2%. 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

In the second quarter of 2014, the company recorded an additional charge related to product liability matters, net of estimated recoveries, to other (income) expense, net, of approximately $259.0 million ($236.0 million after tax). See Note 6 of the notes to condensed consolidated financial statements.

Results of Operations

Net Sales

Bard’s consolidated net sales for the quarter ended June 30, 2014 increased 9% on a reported basis (8% 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, 2014 increased 8% 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 and six months ended June 30, 2014 by approximately 90 basis points and 100 basis points, respectively, 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 June 30, 2014 by approximately one 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, 2014 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 $555.1 million for the quarter ended June 30, 2014 increased 12% compared to $497.6 million in the prior year quarter. International net sales of $272.0 million for the quarter ended June 30, 2014 increased 4% on a reported basis (2% on a constant currency basis) compared to $262.3 million in the prior year quarter. Bard’s United States net sales of $1,106.5 million for the six months ended June 30, 2014 increased 11% compared to $996.1 million in the prior year period. International net sales of $519.9 million for the six months ended June 30, 2014 increased 3% on both a reported basis and constant currency basis compared to $504.1 million in the prior year period.

 

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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,  
     2014      2013      Change     Constant
Currency
    2014      2013      Change     Constant
Currency
 
(dollars in millions)                                        

Vascular

   $ 233.0       $ 212.2         10     8   $ 452.2       $ 415.4         9     8

Urology

     207.1         191.7         8     8     408.5         380.5         7     7

Oncology

     224.7         214.1         5     5     443.7         421.2         5     6

Surgical Specialties

     139.3         120.0         16     16     274.5         240.3         14     14

Other

     23.0         21.9         5     5     47.5         42.8         11     11
  

 

 

    

 

 

        

 

 

    

 

 

      

Total net sales

   $ 827.1       $ 759.9         9     8   $ 1,626.4       $ 1,500.2         8     8
  

 

 

    

 

 

        

 

 

    

 

 

      

Vascular Products - Bard markets a wide range of products for the peripheral vascular market, including endovascular products and vascular graft products. In November 2013, Bard sold certain assets and liabilities of its electrophysiology division (the “EP Sale”) to Boston Scientific, Inc., retaining only the guidewire and temporary pacing electrode product lines. Consolidated net sales of vascular products for the quarter ended June 30, 2014 increased 10% on a reported basis (8% on a constant currency basis) compared to the prior year quarter. This increase includes growth of 18 percentage points on a reported basis (17 percentage points on a constant currency basis) due to a royalty payment from W.L. Gore & Associates Inc. (“Gore”) and a decrease of 14 percentage points on both a reported basis and constant currency basis related to divested electrophysiology products as a result of the EP Sale. Consolidated net sales of vascular products for the six months ended June 30, 2014 increased 9% on a reported basis (8% on a constant currency basis) compared to the prior year period. This increase includes growth of 18 percentage points on both a reported basis and constant currency basis due to royalty payments from Gore and a decrease of 14 percentage points on both a reported basis and constant currency basis related to divested electrophysiology products as a result of the EP Sale. United States net sales of vascular products for the quarter and six months ended June 30, 2014 increased 27% and 28%, respectively, compared to the prior year periods. These increases in United States net sales for both the quarter and six months ended June 30, 2014 were primarily due to royalty payments from Gore, offset by divested electrophysiology products as a result of the EP Sale. International net sales of vascular products for the quarter ended June 30, 2014 decreased 10% on a reported basis (12% on a constant currency basis) compared to the prior year quarter. International net sales of vascular products for the six months ended June 30, 2014 decreased 13% on a reported basis (14% on a constant currency basis) compared to the prior year period. These decreases in international net sales for both the quarter and six months ended June 30, 2014 were primarily due to divested electrophysiology products as a result of the EP Sale and were partially offset by increases in sales of endovascular products.

Consolidated net sales of endovascular products for the quarter ended June 30, 2014 increased 27% on a reported basis (26% on a constant currency basis) compared to the prior year quarter. This increase includes growth of 23 percentage points on both a reported basis and constant currency basis due to a royalty payment from Gore. Consolidated net sales of endovascular products for the six months ended June 30, 2014 increased 26% on a reported basis (25% on a constant currency basis) compared to the prior year period. This increase includes growth of 24 percentage points on both a reported basis and constant currency basis due to royalty payments from Gore. Net sales in this product line for both the quarter and six months ended June 30, 2014 were also favorably impacted by growth in sales of percutaneous transluminal angioplasty balloon catheters and biopsy products, partially offset by declines in sales of stents.

Consolidated net sales of vascular graft products for the quarter ended June 30, 2014 decreased 1% on a reported basis ( 2% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of vascular graft products for the six months ended June 30, 2014 were flat on a reported basis (decreased 2% on a 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 ended June 30, 2014.

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, as well as Targeted Temperature Management products, which are used for therapeutic hypothermia. Consolidated net sales of urology products for the quarter ended June 30, 2014 increased 8% on both a reported basis and constant currency basis compared to the prior year quarter. This increase includes 7 percentage points of growth on a reported basis (8 percentage points on a constant currency basis) from the addition of the Rochester Medical, Inc. (“Rochester Medical”) products acquired in November 2013. Consolidated net sales of urology products for the six months ended June 30, 2014 increased 7% on both a reported basis and constant currency basis compared to the prior year period, which includes 7 percentage points of growth on both a reported basis and constant currency basis from the addition of the Rochester Medical products. Net sales for the quarter and six months ended June 30, 2014 were also favorably impacted by growth in sales of basic drainage products and were offset by declines in sales of

 

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continence products, a trend that may continue, and urological specialty products. United States net sales of urology products for the quarter ended June 30, 2014 increased 6% compared to the prior year quarter. International net sales of urology products for the quarter ended June 30, 2014 increased 12% on a reported basis (10% 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, 2014 increased 5% compared to the prior year period. International net sales of urology products for the six months ended June 30, 2014 increased 11% on both a reported basis and constant currency basis compared to the prior year period.

Consolidated net sales of basic drainage products for both the quarter and six months ended June 30, 2014 increased 7% on both a reported basis and constant currency basis compared to the prior year periods. These increases were primarily due to sales of the Rochester Medical products. Consolidated net sales of infection control Foley catheter products for the quarter ended June 30, 2014 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 six months ended June 30, 2014 increased 2% on both a reported basis and constant currency basis compared to the prior year period.

Consolidated net sales of urological specialty products, including brachytherapy products, for the quarter ended June 30, 2014 decreased 2% on both a reported basis and constant currency basis compared to the prior year quarter. This decrease was primarily due to a decline in sales of brachytherapy products and was partially offset by sales of the Rochester Medical products. Consolidated net sales of urological specialty products for the six months ended June 30, 2014 increased 2% on both a reported basis and constant currency basis compared to the prior year period. This increase was primarily due to sales of the Rochester Medical products offset by a decline in sales of brachytherapy products. 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, 2014 increased 50% on a reported basis (46% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of continence products for the six months ended June 30, 2014 increased 37% on a reported basis (36% on a constant currency basis) compared to the prior year period. These increases were primarily due to sales of the Rochester Medical products and were partially offset by declines 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, 2014 increased 3% 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, 2014 decreased 1% on both a reported basis and 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, 2014 increased 5% 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, 2014 increased 5% on a reported basis (6% on a constant currency basis) compared to the prior year period. These increases were 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, 2014 increased 4% compared to the prior year quarter. International net sales of oncology products for the quarter ended June 30, 2014 increased 8% 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, 2014 increased 4% compared to the prior year period. International net sales of oncology products for the six months ended June 30, 2014 increased 9% on a reported basis (10% on a constant currency basis) compared to the prior year period.

Consolidated net sales of PICCs for the quarter ended June 30, 2014 increased 9% on a reported basis (10% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of PICCs for the six months ended June 30, 2014 increased 10% on both a reported basis and constant currency basis compared to the prior year period. Consolidated net sales of Ports for the quarter ended June 30, 2014 increased 2% on a reported basis (1% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of Ports for the six months ended June 30, 2014 increased 2% 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, 2014 increased 11% on a reported basis (10% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of dialysis access catheters for the six months ended June 30, 2014 increased 10% on a reported basis (9% on a constant currency basis) compared to the prior year period. Consolidated net sales of vascular access ultrasound devices for both the quarter and six months ended June 30, 2014 decreased 6% on both a reported basis and constant currency basis compared to the prior year periods.

 

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Surgical Specialty Products - Surgical specialty products include soft tissue repair products, performance irrigation devices and biosurgery products, including hemostats and sealants. Consolidated net sales of surgical specialty products for the quarter ended June 30, 2014 increased 16% on both a reported basis and constant currency basis compared to the prior year quarter. This increase includes 10 percentage points of growth on both a reported basis and constant currency basis from the addition of the Arista® MHP hemostat product (“Arista®”) through the acquisition of Medafor, Inc. in October 2013. Consolidated net sales of surgical specialty products for the six months ended June 30, 2014 increased 14% on both a reported basis and constant currency basis compared to the prior year period, which includes 10 percentage points of growth on both a reported basis and constant currency basis from the addition of Arista®. Net sales for the quarter and six months ended June 30, 2014 were also favorably impacted by growth in sales of synthetic hernia repair products and were partially offset by declines in sales of natural tissue hernia repair products, performance irrigation products and hernia fixation products, trends that may continue. United States net sales of surgical specialty products for the quarter ended June 30, 2014 increased 17% compared to the prior year quarter. United States net sales of surgical specialty products for the six months ended June 30, 2014 increased 13% compared to the prior year period. These increases in United States net sales were primarily due to sales of Arista® and growth in sales of synthetic hernia repair products. These increases were offset by declines in sales of natural tissue hernia repair products, hernia fixation products, and performance irrigation products, trends that may continue. International net sales of surgical specialty products for the quarter ended June 30, 2014 increased 15% on a reported basis (14% on a constant currency basis) compared to the prior year quarter. International net sales of surgical specialty products for the six months ended June 30, 2014 increased 17% on both a reported basis and constant currency basis compared to the prior year period. These increases in international net sales were primarily due to an increase in sales of synthetic hernia repair products and sales of Arista®.

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, 2014 increased 7% 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, 2014 increased 5% on both a reported basis and constant currency basis compared to the prior year period. Net sales in this product line were favorably impacted by growth in sales of synthetic hernia repair products. This growth was partially offset by declines in sales of natural tissue hernia repair products and hernia fixation products, trends that may continue.

Other Products - The other product group includes irrigation, wound drainage and certain original equipment manufacturers’ products. Consolidated net sales of other products for the quarter ended June 30, 2014 increased 5% on both a reported basis and constant currency basis compared to the prior year quarter. This increase includes 9 percentage points of growth on a reported basis (10 percentage points on a constant currency basis) from the Rochester Medical products. Consolidated net sales of other products for the six months ended June 30, 2014 increased 11% on both a reported basis and constant currency basis compared to the prior year period. This increase includes 13 percentage points of growth on both a reported basis and constant currency basis from the Rochester Medical products.

Costs and Expenses

A summary of costs and expenses as a percentage of net sales is as follows:

 

     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Cost of goods sold

     38.8     39.0     38.7     39.5

Marketing, selling and administrative expense

     29.6     29.8     29.6     29.5

Research and development expense

     10.3     8.7     9.2     8.4

Interest expense

     1.4     1.5     1.4     1.5

Other (income) expense, net

     31.1     38.9     15.5     21.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     111.2     117.9     94.4     100.6
  

 

 

   

 

 

   

 

 

   

 

 

 

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 paid by the company, 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, 2014 decreased 20 basis points and 80 basis points, respectively, compared to the prior year periods primarily due to the impact of the royalty payments from Gore. Incremental amortization of intangible assets acquired in 2013 increased cost of goods sold as a percentage of net sales by approximately 70 basis points over the prior year quarter and six month period.

 

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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 and six months ended June 30, 2014 decreased 20 basis points and increased 10 basis points, respectively, compared to the prior year periods.

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, 2014 was $85.4 million, an increase of approximately 29% compared to the prior year quarter. Research and development expense for the six months ended June 30, 2014 was $149.7 million, an increase of approximately 19% compared to the prior year period. Included in research and development expense for the quarter and six months ended June 30, 2014 was a charge of $20.7 million primarily related to the change in the fair value of the liability for contingent consideration related to the Lutonix, Inc. acquisition. In addition, an IPR&D charge of $0.6 million related to the impairment of an IPR&D project was recorded for the six months ended June 30, 2014. An IPR&D charge of $0.5 million was recorded for the quarter and six months ended June 30, 2013. The increase in research and development expense for the six months ended June 30, 2014 also reflects targeted investments in this area.

Interest expense - Interest expense was $11.3 million and $11.1 million for the quarters ended June 30, 2014 and 2013, respectively. Interest expense was $22.4 million and $22.5 million for the six months ended June 30, 2014 and 2013, respectively.

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

 

     Quarter Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
(dollars in millions)                         

Interest income

   $ (1.1   $ (0.3   $ (1.4   $ (0.6

Foreign exchange (gains) losses

     (2.0     2.1        (1.2     2.8   

Litigation charges, net

     262.7        292.4        262.7        318.2   

Gain on sale of investment

     —          —          (7.1     —     

Asset impairments

     —          2.6        —          6.4   

Restructuring

     —          (1.4     —          (1.4

Other, net

     (2.3     0.3        (1.7     0.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expense, net

   $ 257.3      $ 295.7      $ 251.3      $ 326.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Litigation charges, net – For the quarter and six months ended June 30, 2014, the amounts reflect the estimated costs for product liability matters, net of recoveries, and litigation-related defense costs of $4.2 million in connection with the WHP Pre-Trial Order. For the quarter and six months ended June 30, 2013, the amounts primarily 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 6 of the notes to condensed consolidated financial statements.

Gain on sale of investment – For the six months ended June 30, 2014, the amount reflects the sale of an equity investment in an e-commerce technology company.

Asset impairments – For the quarter and six months ended June 30, 2013, the amounts reflect charges for the write-down of certain core technologies.

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.

Income Tax Provision

The effective tax rate for both the quarter and six months ended June 30, 2014 and 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 also reflected a tax benefit of $10.9 million as a result of the completion of U.S. Internal Revenue Service (“IRS”) examinations for the tax years 2008 through 2010. The effective tax rate for the six months ended June 30, 2013 reflected the discrete tax effect of a write-down of an insurance receivable, which was also incurred in a low tax jurisdiction. See Note 6 of the notes to condensed consolidated financial statements. In addition, the tax provision for the six months ended June 30, 2013 was reduced by approximately $3.7 million to recognize the 2012 benefit of the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013 and retroactively reinstated the research tax credit.

 

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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, 2014 of $119.4 million and $1.59, respectively. Net loss and diluted loss per share available to common shareholders for the prior year quarter were $161.6 million and $2.03, respectively. The current year quarter reflects litigation charges, net, of $240.3 million, or $3.08 per diluted share, amortization of intangible assets of $17.7 million, or $0.23 per diluted share, and acquisition-related items (primarily consisting of purchase accounting adjustments, transaction costs and integration costs) of $22.1 million, or $0.28 per diluted share. The prior year quarter reflects litigation charges, net, of $275.1 million, or $3.33 per diluted share, amortization of intangible assets of $14.5 million, or $0.18 per diluted share, asset impairments of $3.0 million, or $0.04 per diluted share, acquisition-related items (primarily consisting of transaction costs, purchase accounting adjustments and IPR&D) of $1.7 million, or $0.02 per diluted share, and a reversal of certain restructuring costs of $1.0 million, or $0.01 per diluted share.

The company reported net income and diluted earnings per share available to common shareholders for the six months ended June 30, 2014 of $29.0 million and $0.37, respectively. Net loss and diluted loss per share available to common shareholders for the six months ended June 30, 2013 were $70.9 million and $0.88, respectively. The current six month period reflects litigation charges, net, of $240.3 million, or $3.05 per diluted share, amortization of intangible assets of $35.4 million, or $0.45 per diluted share, acquisition-related items (primarily consisting of purchase accounting adjustments, integration costs and transaction costs) of $24.4 million, or $0.31 per diluted share, and a gain on sale of an equity investment of $4.9 million, or $0.06 per diluted share. The current year six month period also reflects a $10.9 million, or $0.14 per diluted share, benefit to the income tax provision as a result of the completion of IRS examinations for the tax years 2008 through 2010. The prior six month period reflects litigation charges, net, of $300.1 million, or $3.60 per diluted share, amortization of intangible assets of $29.1 million, or $0.35 per diluted share, asset impairments of $7.3 million, or $0.09 per diluted share, acquisition-related items (primarily consisting of transaction costs, purchase accounting adjustments, and IPR&D) of $2.4 million, or $0.03 per diluted share, and a reversal of certain restructuring costs of $1.0 million, or $0.01 per diluted share.

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 the company as of June 30, is as follows:

 

     2014      2013  
(dollars in millions)              

Working capital

   $ 1,243.8       $ 1,327.9   
  

 

 

    

 

 

 

Current ratio

     2.59/1         3.64/1   
  

 

 

    

 

 

 

Cash and cash equivalents held by the company’s foreign subsidiaries were $980.5 million and $874.0 million at June 30, 2014 and December 31, 2013, 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 six months ended June 30, 2014 and 2013, net cash provided by operating activities was $284.0 million and $215.7 million, respectively. The increase in net cash provided by operating activities reflects improvements in accounts receivable collections in the current year period, a settlement payment for a certain legal matter in the prior year period and a discretionary contribution to the U.S pension plan in the prior year period. These increases were partially offset by the timing of tax payments in the current year period.

For the six months ended June 30, 2014 and 2013, net cash used by investing activities was $42.2 million and $18.7 million, respectively. Capital expenditures were approximately $55.6 million and $30.6 million for the six month periods ended June 30, 2014 and 2013, respectively. In addition, the company received proceeds from the sale of an investment of $7.1 million during the six months ended June 30, 2014.

 

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For the six months ended June 30, 2014, the company used $314.4 million in cash for financing activities, compared to the $227.6 million used in the prior year period. Total debt was $1.6 billion and $1.4 billion at June 30, 2014 and December 31, 2013, respectively. Total debt to total capitalization was 48.6% and 40.2% at June 30, 2014 and December 31, 2013, respectively. Net cash used in financing activities reflects $526.1 million used to repurchase 3,712,560 shares of common stock in the six months ended June 30, 2014 compared to approximately $309.8 million to repurchase 3,022,388 shares of common stock in the prior year period. The company paid cash dividends of $0.42 per share and $0.40 per share for the six months ended June 30, 2014 and 2013, respectively.

The company maintains a $750 million five-year committed syndicated bank credit facility that expires in September 2018. 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 June 30, 2014, the company was in compliance with this covenant. The company had commercial paper borrowings outstanding of $181.5 million at June 30, 2014. There were no commercial paper borrowings outstanding at December 31, 2013.

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 6 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 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 2013 Annual Report on Form 10-K. There have been no significant changes to the company’s critical accounting policies since December 31, 2013.

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 life-sustaining medical 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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rooms, emergency units, intensive care and critical care settings, among others. These circumstances, among other factors, can cause the products to become associated with adverse clinical events, including patient mortality and injury, and could lead to product liability claims (including lawsuits seeking class action status or seeking to establish multi-district litigation proceedings) and other litigation, product withdrawals, warning letters, recalls, field corrections or regulatory enforcement actions relating to one or more of the company’s products, any of which could have a material adverse effect on our business, results of operations, financial condition and/or liquidity. For further discussion of risks applicable to our business, see “Risk Factors” in Bard’s 2013 Annual Report on Form 10-K.

Because actual results are affected by these and other risks and uncertainties, the company cautions investors that actual results may differ materially from those expressed or implied. It is not possible to predict or identify all risks and uncertainties, but the most significant factors, in addition to those addressed above and those described under Item 1A. “Risk Factors” in Bard’s 2013 Annual Report on Form 10-K, that could adversely affect our business or cause the actual results to differ materially from those expressed or implied include, but are not limited to:

Effective management of and reaction to risks involved in our business, including:

 

    the ability to achieve manufacturing or administrative efficiencies, including gross margin benefits from our manufacturing processes and supply chain programs or in connection with the integration of acquired businesses;

 

    the effects of negative publicity concerning our products, which could result in product withdrawals or decreased product demand and which could reduce market or governmental acceptance of our products;

 

    the ability to identify appropriate companies, businesses and technologies as potential acquisition candidates, to consummate and successfully integrate such transactions or to obtain agreements for such transactions on favorable terms;

 

    the reduction in the number of procedures using our devices caused by customers’ cost-containment pressures or preferences for alternate therapies;

 

    the ability to implement, and realize the benefits of, our prior and planned investments in our business, including research and development expenditures focused on new market categories, and our plan to grow in emerging and/or faster growing markets outside the United States and acquire growth platforms designed to change the mix of our portfolio towards faster, sustainable long-term growth;

 

    the uncertainty of whether research and development expenditures and sales force expansion will result in increased sales;

 

    the ability to reduce exposure and uncertainty related to tax audits, appeals and litigation;

 

    the risk that the company may not successfully implement its expansion of its Enterprise Resource Planning (“ERP”) information system;

 

    internal factors, such as retention of key employees, including sales force employees;

 

    the ability to achieve earnings forecasts, which are generated based, among other things, on projected volumes and sales of many product types, some of which are more profitable than others, and projected royalty revenue related to Gore’s infringing sales;

 

    changes in factors and assumptions or actual results that differ from our assumptions on stock valuation and employee stock option exercise patterns, which could cause compensation expense recorded in future periods to differ significantly from the compensation expense recorded in the current period;

 

    changes in factors and assumptions could cause pension cost recorded in future periods to differ from the pension cost recorded in the current period;

 

    the effect of market fluctuations on the value of assets in the company’s pension plans and the possibility that the company may need to make additional contributions to the plans as a result of any decline in the fair value of such assets;

 

    damage to a facility where our products are manufactured or from which they are distributed, which could render the company unable to manufacture or distribute one or more products and may require the company to reduce the output of products at the damaged facility thereby making it difficult to meet product shipping targets;

 

    the potential impairment of goodwill and intangible assets of the company resulting from insufficient cash flow generated from such assets specifically, or our business more broadly, so as to not allow the company to justify the carrying value of the assets;

 

    the ability to obtain appropriate levels of product liability insurance on reasonable terms;

 

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    the ability to recover for claims made to our insurance companies; and

 

    the ability to realize the anticipated benefits of our restructuring activities to improve the company’s overall cost structure and improve efficiency.

Competitive factors, including:

 

    the trend of consolidation in the medical device industry as well as among our customers, resulting in potentially greater pricing pressures and more significant and complex contracts than in the past, both in the United States and abroad;

 

    development of new products or technologies by competitors having superior performance compared to our current products or products under development which could negatively impact sales of our products or render one or more of our products obsolete;

 

    technological advances, patents and registrations obtained by competitors that would have the effect of excluding the company from new market segments or preventing the company from selling a product or including key features in the company’s products;

 

    attempts by competitors to gain market share through aggressive marketing programs; and

 

    reprocessing by third-party reprocessors of our products designed and labeled for single use.

Difficulties and delays inherent in the development, manufacturing, marketing and sale of medical products, including:

 

    the ability to complete planned and/or ongoing clinical trials successfully, to develop and obtain regulatory approval for products on a timely basis and to launch products on a timely basis within cost estimates;

 

    lengthy and costly regulatory approval processes, which may result in lost market opportunities and/or delayed product launches;

 

    delays or denials of, or grants of low or reduced levels of reimbursement for, procedures using newly developed products;

 

    the suspension or revocation of authority to manufacture, market or distribute existing products;

 

    the imposition of additional or different regulatory requirements, such as those affecting manufacturing and labeling;

 

    performance, efficacy, quality or safety concerns for existing products, whether scientifically justified or not, that may lead to product discontinuations, product withdrawals, recalls, field corrections, regulatory enforcement actions, litigation or declining sales, including adverse events and/or concerns relating to the company’s vena cava filters, pelvic floor repair products and hernia repair products;

 

    FDA inspections resulting in Form-483 notices and/or warning letters identifying deficiencies in the company’s manufacturing practices and/or quality systems; warning letters identifying violations of FDA regulations that could result in product holds, recalls, restrictions on future clearances by the FDA and/or civil penalties;

 

    the failure to obtain, limitations on the use of, or the loss of, patent and other intellectual property rights, and the failure of efforts to protect our intellectual property rights against infringement and legal challenges that can increase our costs;

 

    difficulties obtaining necessary components or raw materials used in the company’s products and/or price increases from the company’s suppliers of critical components or raw materials, including oil-based resins, or other interruptions of the supply chain; and

 

    customers that may limit the number of manufacturers or vendors from which they will purchase products, which can result in the company’s inability to sell products to or contract with large hospital systems, integrated delivery networks or group purchasing organizations.

Governmental action, including:

 

    the impact of continued healthcare cost containment;

 

    new laws and judicial decisions related to healthcare availability, healthcare reform, payment for healthcare products and services or the marketing and distribution of products, including legislative or administrative reforms to the United States Medicare and Medicaid systems or other United States or international reimbursement systems in a manner that would significantly reduce or eliminate reimbursements for procedures that use the company’s products;

 

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    changes in the FDA and/or foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market opportunity;

 

    the impact of more vigorous compliance and enforcement activities affecting the healthcare industry in general or the company in particular;

 

    changes in the tax laws affecting our business, such as proposed comprehensive tax reform in the United States and proposed legislation in multiple jurisdictions resulting from the adoption of Organisation for Economic Co-operation and Development (OECD) policies;

 

    changes in the environmental laws or standards affecting our business;

 

    changes in laws that could require facility upgrades or process changes and could affect production rates and output; and

 

    compliance costs and potential penalties and remediation obligations in connection with environmental laws, including regulations regarding air emissions, waste water discharges and solid waste.

Legal disputes, including:

 

    disputes over legal proceedings, including our patent infringement suit against Gore, the outcome of the Gore matters and the timing of final resolution of the Gore matters;

 

    product liability claims, which may involve lawsuits seeking class action status or seeking to establish multi-district litigation proceedings, including the Hernia Product Claims, the Women’s Health Product Claims and the Filter Product Claims;

 

    claims asserting securities law violations;

 

    claims asserting, and/or subpoenas seeking information regarding, violations of law in connection with federal and/or state healthcare programs such as Medicare or Medicaid;

 

    derivative shareholder actions;

 

    claims and subpoenas asserting antitrust violations;

 

    environmental claims, including risks relating to accidental contamination or injury from the use of hazardous materials in the company’s manufacturing, sterilization and research activities and the potential for the company to be held liable for any resulting damages; and

 

    commercial disputes, including disputes over distribution agreements, license agreements, manufacturing/supply agreements, development/research agreements, acquisition or sale agreements, and insurance policies.

General economic conditions, including:

 

    international and domestic business conditions;

 

    political or economic instability in foreign countries;

 

    interest rates;

 

    foreign currency exchange rates;

 

    changes in the rate of inflation; and

 

    instability of global financial markets and economies including Greece, Italy, Spain, Portugal and other countries in Europe.

Other factors beyond our control, including catastrophes, both natural and man-made, earthquakes, floods, fires, explosions, acts of terrorism or war.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The quantitative and qualitative disclosures about market risk are discussed in “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in Bard’s 2013 Annual Report on Form 10-K. There have been no material changes in the information reported since the year ended December 31, 2013.

 

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Item 4. Controls and Procedures

The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the company’s reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. Any controls and procedures, no matter how well defined and operated, can provide only reasonable assurance of achieving the desired control objectives.

The company’s management, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the company’s disclosure controls and procedures as of June 30, 2014. Based upon that evaluation, the company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2014, the design and operation of the company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to accomplish their objectives at the reasonable assurance level. There have been no changes in internal control over financial reporting for the quarter ended June 30, 2014 that have materially affected, or are likely to materially affect, the company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

General

In the ordinary course of business, the company is subject to various legal proceedings, investigations and claims, including, for example, environmental matters, employment disputes, disputes on agreements and other commercial disputes. In addition, the company operates in an industry susceptible to significant product liability and 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. If a third party’s patent infringement claim were to be determined against the company, the company might be required to make significant royalty or other payments or might be subject to an injunction or other limitation on its ability to manufacture or distribute one or more products. If a patent owned by or licensed to the company is found to be invalid or unenforceable, the company might be required to reduce the value of certain intangible assets on the company’s balance sheet and to record a corresponding charge, which could be significant in amount. Many of the company’s legal proceedings and claims could have a material adverse effect on its business, results of operations, financial condition and/or liquidity.

Product Liability Matters

As of July 7, 2014, approximately 220 federal and 105 state lawsuits involving individual claims by approximately 325 plaintiffs, as well as two putative class actions in the United States are currently pending against the company with respect to its Composix® Kugel® and certain other hernia repair implant products (collectively, the “Hernia Product Claims”). The company voluntarily recalled certain sizes and lots of the Composix® Kugel® products beginning in December 2005. One of the U.S. putative class action lawsuits consolidated ten previously-filed U.S. class action lawsuits. The putative class actions, none of which has been certified, seek: (i) medical monitoring; (ii) compensatory damages; (iii) punitive damages; (iv) a judicial finding of defect and causation; and/or (v) attorneys’ fees. In the third quarter of 2013, a settlement was reached with respect to the three pending putative Canadian class actions within amounts previously recorded by the company and were fully resolved in April 2014. Approximately 85 of the state lawsuits, involving individual claims by approximately 85 plaintiffs, are pending in the Superior Court of the State of Rhode Island, with the remainder in various other jurisdictions. The Hernia Product Claims also generally seek damages for personal injury resulting from use of the products.

In June 2007, the Composix® Kugel® lawsuits and, subsequently, other hernia repair product lawsuits, pending in federal courts nationwide were transferred into one Multidistrict Litigation (“MDL”) for coordinated pre-trial proceedings in the United States District Court for the District of Rhode Island.

On June 30, 2011, the company announced that it had reached agreements in principle with various plaintiffs’ law firms to settle the majority of its existing Hernia Product Claims. Each agreement was subject to certain conditions, including requirements for participation in the proposed settlements by a certain minimum number of plaintiffs. In addition, the company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Hernia Product Claims, and intends to vigorously defend Hernia Product Claims that do not settle, including through litigation. The company cannot give any assurances that the resolution of the Hernia Product Claims that have not settled, including asserted and unasserted claims and the putative class action lawsuits, will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

As of July 7, 2014, product liability lawsuits involving individual claims by approximately 12,445 plaintiffs have been filed or asserted against the company in various federal and state jurisdictions alleging personal injuries associated with the use of certain of the company’s surgical continence products for women, including its Avaulta® line of products. In addition, five putative class actions in the United States and four putative class actions in Canada have been filed against the company (all lawsuits, collectively, the “Women’s Health Product Claims”). The Women’s Health Product Claims generally seek damages for personal injury resulting from use of the products. The putative class actions, none of which has been certified, seek: (i) medical monitoring; (ii) compensatory damages; (iii) punitive damages; (iv) a judicial finding of defect and causation; and/or (v) attorneys’ fees. With respect to approximately half of the filed and asserted Women’s Health Product Claims, the company believes that one of its suppliers has an obligation to defend and indemnify the company with respect to any product defect liability.

In October 2010, the Women’s Health Product Claims involving solely Avaulta® products pending in federal courts nationwide were transferred into an MDL in the United States District Court for the Southern District of West Virginia (the “District Court”), the scope of which was later expanded to include lawsuits involving all women’s surgical continence products that are manufactured or distributed by the company. The first trial in a state court was completed in July 2012 and resulted in a judgment against the company of approximately $3.6 million. The company has appealed this decision. The first trial in the MDL commenced in July 2013 and resulted in a judgment against the company of approximately $2 million. The company intends to appeal the judgment. During the third quarter of 2013, the company settled one MDL case and one New

 

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Jersey state case. In addition, during the third quarter of 2013, one MDL case was voluntarily dismissed with prejudice. On January 16, 2014, the District Court ordered that the company prepare 200 individual cases for trial (the “WHP Pre-Trial Order”) (the timing for which is currently unknown), which has resulted in additional cost in the second quarter of 2014, and is expected to result in material additional cost in 2014 in defending Women’s Health Product Claims. The District Court may order that the company prepare additional cases for trial, which could result in material additional costs in future periods. During the second quarter of 2014, the company reached an agreement with two plaintiffs’ law firms to settle their inventory of cases, representing more than 500 of the filed or asserted Women’s Health Product Claims, which the company believes are not the subject of its supplier’s indemnification obligation. The company also settled one MDL case that was originally scheduled for trial in May 2014. In addition, the company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Women’s Health Product Claims, which may include additional inventory settlements. While no MDL trials are scheduled for the remainder of 2014, the company anticipates that multiple additional trials, including a possible consolidated trial, may occur in early 2015. Additional state court trials are scheduled throughout the second half of 2014.

The company does not believe that any verdicts entered to date are representative of potential outcomes of all Women’s Health Product Claims. The case numbers set forth above do not include approximately 1,020 generic complaints involving women’s health products where the company cannot, based on the allegations in the complaints, determine whether any of those cases involves the company’s women’s health products. In addition, the case numbers set forth above do not include approximately 2,115 claims that have been threatened against the company but for which complaints have not yet been filed. While the company continues to engage in discussions with other plaintiffs’ law firms regarding potential resolution of unsettled Women’s Health Product Claims and intends to vigorously defend the Women’s Health Product Claims that do not settle, including through litigation, it cannot give any assurances that the resolution of these claims will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

As of July 7, 2014, product liability lawsuits involving individual claims by 50 plaintiffs are currently pending against the company in various federal and state jurisdictions alleging personal injuries associated with the use of the company’s vena cava filter products. In addition, three putative class actions were filed against the company in various state courts on behalf of plaintiffs who are alleged to have no present injury (all lawsuits, collectively, the “Filter Product Claims”). Two of these putative class actions were dismissed during the second quarter of 2013, and class certification was denied for the third putative class action in July 2013. The first Filter Product Claim trial was completed in June 2012 and resulted in a judgment for the company. The company expects additional trials of Filter Product Claims to take place over the next 12 months. During the second quarter of 2013, the company finalized settlement agreements with respect to more than 30 Filter Product Claims and made payments with respect to such claims within the amounts previously recorded. The case numbers set forth above do not include approximately 165 claims that have been threatened against the company but for which complaints have not yet been filed. While the company intends to vigorously defend the remaining unsettled Filter Product Claims, it cannot give any assurances that the resolution of these claims will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

In most product liability litigations of this nature, plaintiffs allege a wide variety of claims, ranging from allegations of serious injury caused by the products to efforts to obtain compensation notwithstanding the absence of any injury. In many of these cases, the company has not yet received and reviewed complete information regarding the plaintiffs and their medical conditions and, consequently, is unable to fully evaluate the claims. The company expects that it will receive and review additional information regarding any remaining unsettled product liability matters.

The company believes that some settlements and judgments, as well as some legal defense costs, relating to product liability matters are or may be covered in whole or in part under its product liability insurance policies with a limited number of insurance carriers, or, in some circumstances, indemnification obligations to the company from other parties. In certain circumstances, insurance carriers reserve their rights with respect to coverage, or contest or deny coverage, as has occurred with respect to certain claims. When this occurs, the company intends to vigorously contest disputes with respect to its insurance coverage and to enforce its rights under the terms of its insurance policies, and accordingly, will record receivables with respect to amounts due under these policies, when recovery is probable. Amounts recovered under the company’s product liability insurance policies or indemnification arrangements may be less than the stated coverage limits or less than otherwise expected and may not be adequate to cover damages and/or costs relating to claims. In addition, there is no guarantee that insurers or other parties will pay claims or that coverage or indemnity will be otherwise available.

The company’s insurance coverage with respect to the Hernia Product Claims has been exhausted. In the first quarter of 2013 the company recorded a non-cash charge of $25.0 million ($24.5 million after tax) to other (income) expense, net, for the write-down of an insurance receivable related to a dispute with one of its excess insurance carriers in connection with these claims.

 

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Other Legal Matters

Since early 2013, the company has received subpoenas or Civil Investigative Demands from a number of State Attorneys General seeking information related to the sales and marketing of certain of the company’s products that are the subject of the Hernia Product Claims and the Women’s Health Product Claims. The company is cooperating with these requests. Since it is not feasible to predict the outcome of these proceedings, the company cannot give any assurances that the resolution of these proceedings will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

In December 2007, a U.S. District Court jury in Arizona found that certain of W.L. Gore & Associates Inc.’s (“Gore”) ePTFE vascular grafts and stent-grafts infringe the company’s patent number 6,436,135 (the “135 patent”). The jury upheld the validity of the patent and awarded the company $185 million in past damages. The jury also found that Gore willfully infringed the patent. In a second phase of the trial, the District Court ruled that Gore failed to prove that the patent is unenforceable due to inequitable conduct. In March 2009, the District Court doubled the jury award to approximately $371 million for damages through June 2007. The District Court also awarded the company attorneys’ fees of $19 million and prejudgment interest of approximately $20 million. In addition, the District Court denied Gore’s remaining motions, including its motions for a new trial and to set aside the jury’s verdict. In July 2010, the District Court awarded the company approximately $109 million in additional damages for the period from July 2007 through March 2009. The District Court also assessed a royalty rate of between 12.5% and 20%, depending on the product, that will be used to calculate damages for Gore’s infringing sales from April 2009 through the expiration of the patent.

Gore appealed this matter to the Court of Appeals for the Federal Circuit (the “Court of Appeals”), which on February 10, 2012 affirmed the decision of the District Court. Gore filed a petition with the Court of Appeals for a rehearing of its appeal. On June 14, 2012, the Court of Appeals reaffirmed its February 10, 2012 decision, including the ongoing royalty rates as set by the District Court, with the exception of the issue of willfulness with respect to Gore’s infringement of the 135 patent, which was remanded to the District Court for further consideration. On October 12, 2012, Gore filed a petition for a writ of certiorari to the U.S. Supreme Court requesting a review of the portion of the decision that the Court of Appeals reaffirmed. The U.S. Supreme Court denied Gore’s petition on January 14, 2013.

On January 28, 2013, Gore filed with the U.S. District Court a Request for Judicial Notice that the U.S. Patent and Trademark Office (“USPTO”) granted Gore’s previously filed request for a re-examination of the 135 patent. On April 1, 2013, the USPTO issued a First Office Action initially rejecting all of the claims of the 135 patent that are the subject of the re-examination. On July 10, 2013, the USPTO issued a Notice of Intent to Issue an Ex Parte Reexamination Certificate upholding the patentability of all re-examined claims of the 135 patent. This action terminated the re-examination proceeding and upheld the claims involved in the re-examination.

On remand of the action from the Court of Appeals, the District Court heard oral argument on June 5, 2013 on three motions pending before it – Gore’s motion requesting a determination that Gore’s infringement was not willful, Gore’s motion for a new trial, and the company’s motion to execute on the judgment with respect to all amounts other than enhanced damages due to willfulness. On October 16, 2013, the District Court denied Gore’s motion for entry of a judgment holding that Gore’s infringement was not willful and Gore’s motion for a new trial. The District Court granted the company’s motion to execute on the judgment, holding that all aspects of the judgment relating to infringement were “final and non-appealable.” The District Court continued its stay on the execution of the judgment with respect to willfulness and the related enhanced damages.

On November 1, 2013, Gore paid to the company $894.3 million in cash (the “Gore Proceeds”), the total amount of the compensatory damages for infringement, including pre- and post-judgment interest, and the royalties accrued through September 30, 2013. Gore expressly reserved its right to appeal from the District Court’s rulings and notified the company that, if successful on appeal, it would seek to recover the amounts paid to the company. On December 5, 2013, Gore filed an appeal in the Court of Appeals on all of the District Court’s rulings, including the order denying Gore’s motion for a new trial. The Court of Appeals is scheduled to hear oral argument on Gore’s appeal of the District Court’s rulings on August 8, 2014.

In the fourth quarter of 2013, the company recorded a gain of $894.3 million ($557.4 million after tax) to other (income) expense, net, based on the District Court’s October 2013 rulings and the company’s receipt of the Gore Proceeds. In addition, the company received $37.6 million from Gore in April 2014 representing Gore’s calculation of royalties for its infringing sales for the quarter ended March 31, 2014. This royalty payment was recorded to revenue in the second quarter of 2014. Royalty payments of $75.2 million were recorded to revenue for the six months ended June 30, 2014. The company has received cumulative proceeds from Gore of $969.5 million. The company has concluded that the chance of Gore establishing its right to recover this cash is remote. The company continues to account for the enhanced damages awarded by the District Court due to Gore’s willfulness as a contingent gain.

 

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The timing of final resolution of this litigation remains uncertain. The company cannot give any assurances that royalties for Gore’s future infringing sales will remain at or near historic levels.

The company is subject to numerous federal, state, local and foreign environmental protection laws governing, among other things, the generation, storage, use and transportation of hazardous materials and emissions or discharges into the ground, air or water. The company is or may become a party to proceedings brought under various federal laws including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly known as Superfund, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act and similar state or foreign laws. These proceedings seek to require the owners or operators of contaminated sites, transporters of hazardous materials to the sites and generators of hazardous materials disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. In most cases, there are other potentially responsible parties that may be liable for remediation costs. In these cases, the government alleges that the defendants are jointly and severally liable for the cleanup costs; however, these proceedings are frequently resolved so that the allocation of cleanup costs among the parties more closely reflects the relative contributions of the parties to the site contamination. The company’s potential liability varies greatly from site to site. For some sites, the potential liability is de minimis and for others the costs of cleanup have not yet been determined. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study and are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. The company believes that the proceedings and claims described above will likely be resolved over an extended period of time. While it is not feasible to predict the outcome of these proceedings, based upon the company’s experience, current information and applicable law, the company does not expect these proceedings to have a material adverse effect on its financial condition and/or liquidity. However, one or more of the proceedings could be material to the company’s business and/or results of operations.

The company regularly monitors and evaluates the status of product liability and other legal matters, and may, from time-to-time, engage in settlement and mediation discussions taking into consideration developments in the matters and the risks and uncertainties surrounding litigation. These discussions could result in settlements of one or more of these claims at any time.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Part I, Item 1A. in Bard’s 2013 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to the shares of the company’s common stock repurchased during the quarter ended June 30, 2014:

 

     Issuer Purchases of Equity Securities  

Period

   Total
Number
of Shares
Purchased(1)
     Average
Price
Paid
Per Share
     Total Number
of Shares
Purchased as
Part of Publicly
Announced
Programs(2)
     Maximum
Approximate
Dollar Value of
Shares
that May Yet
Be Purchased
Under Plans or
Programs(2)
 

April 1 – April 30, 2014

     1,154,459       $ 143.21         1,154,113       $ 133,819,572   

May 1 – May 31, 2014

     740,122         144.92         725,000         28,647,500   

June 1 – June 30, 2014

     —           —           —           528,647,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,894,581       $ 143.88         1,879,113       $ 528,647,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes 15,468 shares that the company repurchased during the three-month period ended June 30, 2014 that were not part of publicly-announced share repurchase authorizations. These shares were purchased from employees to satisfy tax withholding requirements on the vesting of restricted shares from equity-based awards.
(2) On January 30, 2014, the company announced that its Board of Directors had authorized the repurchase of up to an additional $500 million of common stock of the company. On June 11, 2014, the Board of Directors authorized the repurchase of up to an additional $500 million of common stock.

 

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Table of Contents

Item 5. Other Information

The company’s policy governing transactions in its securities by the company’s directors, executive officers and other specified employees permits such persons to adopt trading plans pursuant to Rule 10b5-1 of the Exchange Act. From time-to-time, the company’s executive officers have established trading plans relating to the company’s common stock under Rule 10b5-1, and the company anticipates additional trading plans may be established in the future. The company currently discloses details regarding individual trading plans on its website.

Item 6. Exhibits

 

Number

 

Description

  10.38**   2012 Long Term Incentive Plan of C. R. Bard, Inc. (as Amended and Restated), effective April 16, 2014, filed as Exhibit 10.38 to the company’s April 17, 2014 Form 8-K, is incorporated herein by reference
  12.1   Computation of Ratio of Earnings to Fixed Charges*
  31.1   Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer*
  31.2   Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer*
  32.1   Section 1350 Certification of Chief Executive Officer (furnished herewith)
  32.2   Section 1350 Certification of Chief Financial Officer (furnished herewith)
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Extension Label Linkbase Document*
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Filed herewith.
** Constitutes a management contract or a compensatory plan or arrangement.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    C. R. BARD, INC.
        (Registrant)
Date: July 25, 2014      
     

/s/    CHRISTOPHER S. HOLLAND        

     

Christopher S. Holland

Senior Vice President and

Chief Financial Officer

     

/s/    FRANK LUPISELLA JR.        

     

Frank Lupisella Jr.

Vice President and Controller

 

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Table of Contents

INDEX TO EXHIBITS

 

Number

  

Description

  10.38    2012 Long Term Incentive Plan of C. R. Bard, Inc. (as Amended and Restated), effective April 16, 2014, filed as Exhibit 10.38 to the company’s April 17, 2014 Form 8-K, is incorporated herein by reference
  12.1    Computation of Ratio of Earnings to Fixed Charges
  31.1    Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
  31.2    Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
  32.1    Section 1350 Certification of Chief Executive Officer (furnished herewith)
  32.2    Section 1350 Certification of Chief Financial Officer (furnished herewith)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

35

EX-12.1

EXHIBIT 12.1

C. R. BARD, INC. AND SUBSIDIARIES

Exhibit 12.1 - Computation of Ratio of Earnings to Fixed Charges

 

     Six Months
Ended
June 30,
2014
    Years Ended December 31,  
       2013     2012     2011     2010     2009  
(dollars in millions)                                     

Earnings from operations before taxes

   $ 90.8      $ 1,213.4      $ 732.4      $ 510.8      $ 717.7      $ 671.5   

Add (Deduct):

            

Fixed charges

     26.1        52.4        46.1        42.7        18.4        17.5   

Undistributed earnings of equity investments

     (0.3     (1.0     (9.6     (3.8     (3.6     (2.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings available for fixed charges

   $ 116.6      $ 1,264.8      $ 768.9      $ 549.7      $ 732.5      $ 686.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed charges:

            

Interest, including amounts capitalized(1)

   $ 22.4      $ 45.0      $ 39.6      $ 36.4      $ 12.7      $ 11.8   

Proportion of rent expense deemed to represent interest factor

     3.7        7.4        6.5        6.3        5.7        5.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed charges

   $ 26.1      $ 52.4      $ 46.1      $ 42.7      $ 18.4      $ 17.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of earnings to fixed charges

     4.47        24.14        16.68        12.87        39.81        39.24   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Interest related to unrecognized tax benefits is included as income tax expense and not included in fixed charges.
EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer

I, Timothy M. Ring, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of C. R. Bard, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 25, 2014

/s/ Timothy M. Ring

Timothy M. Ring
Chief Executive Officer
EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer

I, Christopher S. Holland, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of C. R. Bard, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 25, 2014

/s/ Christopher S. Holland

Christopher S. Holland
Senior Vice President and Chief Financial Officer
EX-32.1

EXHIBIT 32.1

SECTION 1350 CERTIFICATIONS

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of C. R. Bard, Inc. on Form 10-Q for the period ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy M. Ring, Chairman and Chief Executive Officer of C. R. Bard, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of C. R. Bard, Inc.

 

/s/ Timothy M. Ring

Name: Timothy M. Ring
Date: July 25, 2014
EX-32.2

EXHIBIT 32.2

SECTION 1350 CERTIFICATIONS

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of C. R. Bard, Inc. on Form 10-Q for the period ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher S. Holland, Senior Vice President and Chief Financial Officer of C. R. Bard, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of C. R. Bard, Inc.

 

/s/ Christopher S. Holland

Name: Christopher S. Holland
Date: July 25, 2014