TEXT-S&P rates C.R. Bard notes 'A'
Overview -- U.S.-based medical devices manufacturer C.R. Bard Inc. is refinancing some of its debt and funding an acquisition. -- Sluggish demand and weak pricing has constrained EBITDA, contributing to a rise in adjusted leverage to about 1.8x, pro forma for a new $500 million debt issue. -- We are assigning Bard's proposed $500 million senior unsecured notes due 2018 our 'A' issue-level rating. -- The stable rating outlook reflects our expectation Bard will continue to generate substantial discretionary cash flow and will maintain adjusted debt leverage of below 2x. Rating Action On Oct. 25, 2012, Standard & Poor's Ratings Services affirmed its 'A' corporate credit rating on Murray Hill, N.J.-based C.R. Bard Inc. The rating outlook is stable. At the same time, we assigned the company's proposed $500 million senior unsecured notes due 2018 our 'A' issue-level rating (the same as the corporate credit rating). Rationale The ratings on Murray Hill, N.J.-based C.R. Bard Inc. reflect the medical device manufacturer's "strong" business risk profile (based on our criteria). Bard's well-established positions across several business segments provide diversity that supports this assessment, and contributes to our expectation for mid-single-digit revenue growth through 2013. Bard's "modest" financial risk profile features strong credit measures, allowing investment to keep pace with developing medical technology. C.R. Bard is a manufacturer of oncology, surgical, urology, and vascular products. We expect mid-single-digit revenue increases through 2013 to reflect low-single-digit organic growth, supplemented by acquisitions. This would extend the revenue growth trend of the past few years. Year-over-year constant-currency revenue growth of 3% in the three quarters of 2012 is nearly in line with our expectation; we expect moderate-sized acquisitions to offset sluggish demand and pricing. Bard's performance has particularly benefited from double-digit growth in international revenues (about one-third of the corporate total), aided by the acquisition of Medivance and ClearStream, makers of critical care and angioplasty products, respectively. We expect that it will take some time for revenues to benefit from the recent $140 million acquisition of Neomend Inc.; its specialty portfolio includes the only product approved by the U.S. Food and Drug Administration for the treatment of intraoperative air leaks in connection with thoracic surgery. Overall, we believe relative demand inelasticity for health care products should support revenues. Prospects are somewhat clouded by industry price pressures and the likely absence of a meaningful rebound in the commercially insured population (with unemployment rates that we believe will be sustained at levels in the low 8% range). We expect hospital admissions in the U.S. to be limited in the near term because of a still-weak economy. This could slow Bard's revenue growth, partly because of price declines that shave average pricing by 100 basis points this year. Still, more rapid international expansion and acquisitions should allow the company to maintain mid-single-digit overall revenue gains. Our base case provides room for Bard's 33.5% adjusted last-12-months' EBITDA margins as of Sept. 30, 2012, to modestly contract in 2013 because of pricing pressures and the 2.3% medical device tax that begins in 2013. However, we also expect Bard to maintain strong liquidity and cash flow; we project the company will generate funds from operations (FFO) at a rate exceeding $700 million annually through 2013. We expect Bard to generate FFO to total adjusted debt of greater than 50% through 2013. We believe projected adjusted debt to EBITDA will remain under 2x through 2013. Bard's strong business risk profile is supported by its well-established positions across oncology, surgical, urology, and vascular product markets, with a particular strength in urology catheters and specialty access products. We believe Bard derives the majority of revenues from products for which it has a No. 1 or No. 2 market share, and is not overly reliant on any particular device for its revenues. New product development is a key to success for Bard because its products are vulnerable to technological change and may become commodity-like. Bard's strategy of buying and leveraging early-stage technologies is highlighted by the Neomend acquisition as well as the fourth-quarter 2011 acquisition of Lutonix, a maker of a drug-coated angioplasty balloon, for about $300 million, including contingent payments. Combined with internal research and development, which we expect will grow from 6.5% to 7% of revenues over the next few years, this will better position Bard to introduce innovations that are less sensitive to price pressures that face commodity-type products. Bard's high margins, relative to those of Covidien PLC, which has a much larger revenue base, contributes to our assessment that the business risk profiles of the two medical products companies are comparably strong. We expect Bard will maintain a modest level of financial risk. Adjusted debt to EBITDA of 1.5x as of Sept. 30, 2012, will rise to about 1.8x pro forma for the new debt, while FFO to lease-adjusted debt of 55% will slip to 50%. These credit metrics are consistent with our guidelines for the modest financial risk profile (debt to EBITDA of 1.5x to 2x and FFO to debt of 45% to 60%). We assume after-tax proceeds from patent litigation in excess of $500 million will provide funds for acquisitions, dividends, and share repurchases, which will preclude the necessity for more than only limited additional borrowing. We expect EBITDA to grow modestly, and free cash flow to be allocated to the growth strategy. Leverage is expected to remain below 2x in this scenario, but capacity for additional leverage is pretty limited at this stage. Liquidity Our short-term credit rating on Bard is 'A-1'. We believe the company's liquidity is strong, with sources of cash that should exceed mandatory uses of cash over the next 12 to 24 months. Our assessment of Bard's liquidity profile incorporates the following expectations and assumptions: -- Sources of liquidity will exceed uses by 1.5x or more. -- Sources of liquidity as of Sept. 30, 2012, included unrestricted cash and cash equivalents of $809 million (virtually all held by foreign subsidiaries and subject to a tax on repatriation to the U.S.). -- Bard generated $525 million of free operating cash flow in the 12 months through Sept. 30, 2012. -- Through 2013, we expect FFO to be generated at a rate of more than $700 million annually, minimal working capital uses, roughly $60 million of annual capital expenditure, and routine cash dividends of about $70 million per year. -- Proceeds from newly issued debt will reduce current commercial paper borrowing of some $380 million, providing full capacity under its $600 million commercial paper program. Bard has a $600 million credit agreement expiring Oct. 12, 2016, which supports its commercial paper program. -- The credit facility subjects the company to a financial covenant that limits the amount of total debt to total capitalization, which we do not expect to become a problem. -- The company does not have any significant near-term maturities. In June, 2012, the Court of Appeals affirmed damages of $681 million awarded to Bard in a prior decision of a patent infringement suit with W.L. Gore & Associates; a decision on some $200 million in additional damages, fees, and interest was remanded back to the District Court. The infringement damages case is subject to appeal by the U.S. Supreme Court. However, we expect the company to collect on this award, based on the experience of the litigation to date. Outlook Our stable rating outlook reflects our expectation that Bard will continue to expand its product portfolio with moderate-sized acquisitions, but will also maintain the credit measures necessary to preserve the company's existing credit profile. Given the diversity of its portfolio and historical stability of earnings, we do not expect that a deterioration of operating trends would result in a lower rating. Still, the company is somewhat capacity constrained at current leverage levels. Although not expected, we could lower our rating if Bard makes acquisitions or share repurchases that require additional debt financing and result in an increase in adjusted debt leverage beyond 1.8x. A ratings upgrade seems unlikely in the foreseeable future, since a much more conservative financial risk profile would be the most likely cause. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed Bard (C.R.) Inc. Corporate Credit Rating A/Stable/A-1 Senior Unsecured A Commercial Paper A-1 New Rating Bard (C.R.) Inc. $500M sr unsecd nts due 2018 A Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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