-- 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
-- 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.
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
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.
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
-- 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
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,
-- 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
Bard (C.R.) Inc.
Corporate Credit Rating A/Stable/A-1
Senior Unsecured A
Commercial Paper A-1
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