Form 10-Q
Table of Contents

 

 

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 September 30, 2010

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  ¨

 

Smaller reporting company   ¨

(Do not check if 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 September 30, 2010

Common Stock - $0.25 par value

  92,902,645

 

 

 


Table of Contents

 

C. R. BARD, INC. AND SUBSIDIARIES

INDEX

 

         PAGE NO.  

PART I – FINANCIAL INFORMATION

 

Item 1.

  

Financial Statements (unaudited)

 
  

Condensed Consolidated Statements of Income for the Quarter and Nine Months Ended September 30, 2010 and 2009

    3   
  

Condensed Consolidated Balance Sheets – September 30, 2010 and December 31, 2009

    4   
  

Condensed Consolidated Statements of Shareholders’ Investment for the Nine Months Ended September 30, 2010 and 2009

    5   
  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

    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

    29   

Item 4.

  

Controls and Procedures

    29   

PART II – OTHER INFORMATION

 

Item 1.

  

Legal Proceedings

    30   

Item 1A.

  

Risk Factors

    33   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

    33   

Item 5.

  

Other Information

    33   

Item 6.

  

Exhibits

    33   

Signatures

    34   

 

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Table of Contents

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

C. R. BARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands except per share amounts, unaudited)

 

    Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
    2010     2009     2010     2009  

Net sales

  $ 678,400      $ 637,000      $ 2,003,100      $ 1,858,000   

Costs and expenses:

       

Cost of goods sold

    251,900        240,900        756,300        703,800   

Marketing, selling and administrative expense

   
185,900
  
    164,300        555,100        498,500   

Research and development expense

    47,500        43,000        133,200        121,100   

Interest expense

    3,200        3,000        8,900        9,000   

Other (income) expense, net

    6,700        600        8,700        17,500   
                               

Total costs and expenses

    495,200        451,800        1,462,200        1,349,900   
                               

Income from operations before income taxes

    183,200        185,200        540,900        508,100   

Income tax provision

    55,700        55,200        167,500        152,500   
                               

Net income

    127,500        130,000        373,400        355,600   

Net income attributable to noncontrolling interest

    —          500        400        1,400   
                               

Net income attributable to common shareholders

  $ 127,500      $ 129,500      $ 373,000      $ 354,200   
                               

Basic earnings per share available to common shareholders

  $ 1.35      $ 1.32      $ 3.91      $ 3.57   
                               

Diluted earnings per share available to common shareholders

  $ 1.34      $ 1.31      $ 3.86      $ 3.52   
                               

 

 

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

 

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C. R. BARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

    September  30,
2010
    December  31,
2009
 

ASSETS

   

Current assets:

   

Cash and cash equivalents

  $ 662,200      $ 674,400   

Accounts receivable, less allowances of $11,300 and $9,700, respectively

    435,000        442,100   

Inventories

    315,300        295,400   

Short-term deferred tax assets

    52,800        46,500   

Other current assets

    54,600        33,400   
               

Total current assets

    1,519,900        1,491,800   
               

Property, plant and equipment, at cost

    604,600        607,000   

Less accumulated depreciation and amortization

    282,200        273,900   
               

Net property, plant and equipment

    322,400        333,100   

Goodwill

    609,700        507,400   

Other intangibles assets, net

    542,000        406,400   

Deferred tax assets

    90,000        97,400   

Other assets

    75,600        70,800   
               

Total assets

  $ 3,159,600      $ 2,906,900   
               

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

   

Current liabilities:

   

Short-term borrowings

  $ 216,000      $ —     

Accounts payable

    62,400        50,800   

Accrued compensation and benefits

    98,900        98,000   

Accrued expenses

    131,400        117,500   

Income taxes payable

    9,800        15,400   
               

Total current liabilities

    518,500        281,700   
               

Long-term debt

    149,800        149,800   

Other long-term liabilities

    245,000        249,500   

Deferred income taxes

    15,200        20,000   

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 92,902,645 shares at September 30, 2010 and 95,917,095 shares at December 31, 2009

    23,200        24,000   

Capital in excess of par value

    1,115,200        1,060,900   

Retained earnings

    1,171,900        1,133,400   

Accumulated other comprehensive loss

    (79,200     (24,700

Noncontrolling interest

    —          12,300   
               

Total shareholders’ investment

    2,231,100        2,205,900   
               

Total liabilities and shareholders’ investment

  $ 3,159,600      $ 2,906,900   
               

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

 

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C. R. BARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ INVESTMENT

(dollars in thousands except share amounts, unaudited)

 

    Common Stock     Capital in
Excess of Par
Value
    Retained
Earnings
    Accumulated
Other Comp.
(Loss)/Inc.
    Noncontrolling
Interest
    Total  
    Shares     Amount            

Balance at December 31, 2009

  95,917,095      $ 24,000      $ 1,060,900      $ 1,133,400      $ (24,700   $ 12,300      $ 2,205,900   

Net income

          373,000          400        373,400   

Change in derivative instruments designated as cash flow hedges (net of $1,000 taxes)

            2,200          2,200   

Foreign currency translation adjustment

            (60,100       (60,100

Amortization of items included in net periodic benefit cost (net of $1,900 taxes)

            3,400          3,400   
                   

Total comprehensive income

                318,900   

Cash dividends declared in current year

          (33,400         (33,400

Issuance of common stock

  698,250        100        21,600              21,700   

Share-based compensation

        38,700              38,700   

Purchase of common stock

  (3,712,700     (900       (301,100         (302,000

Tax benefit relating to share-based compensation plans

        7,200              7,200   

Purchase of noncontrolling interest

        (13,200         (12,700     (25,900
                                                     

Balance at September 30, 2010

  92,902,645      $ 23,200      $ 1,115,200      $ 1,171,900      $ (79,200   $ —        $ 2,231,100   
                                                     

Balance at December 31, 2008

  99,393,020      $ 24,800      $ 966,600      $ 1,080,200      $ (94,400   $ 11,000      $ 1,988,200   

Net income

          354,200          1,400        355,600   

Change in derivative instruments designated as cash flow hedges (net of $1,100 taxes)

            (5,700       (5,700

Foreign currency translation adjustment

            64,000          64,000   

Amortization of items included in net periodic benefit cost (net of $1,000 taxes)

            1,600          1,600   
                   

Total comprehensive income

                415,500   

Cash dividends declared in current year

          (32,800         (32,800

Issuance of common stock

  789,329        200        18,600              18,800   

Share-based compensation

        37,400              37,400   

Purchase of common stock

  (3,646,147     (900       (271,000         (271,900

Tax benefit relating to share-based compensation plans

        7,300              7,300   
                                                     

Balance at September 30, 2009

  96,536,202      $ 24,100      $ 1,029,900      $ 1,130,600      $ (34,500   $ 12,400      $ 2,162,500   
                                                     

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

 

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C. R. BARD, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands, unaudited)

 

     Nine Months
Ended September 30,
 
       2010         2009    

Cash flows from operating activities:

    

Net income

   $ 373,400      $ 355,600   

Adjustments to reconcile net income to derive net cash provided from operating activities, net of acquired businesses:

    

Depreciation and amortization

     77,300        69,100   

Restructuring charge, net of payments

     —          3,000   

Purchased research and development

     500        2,700   

Non-cash charge related to asset disposition

     —          5,700   

Deferred income taxes

     (10,500     (8,100

Share-based compensation

     39,000        37,700   

Inventory reserves and provision for doubtful accounts

     14,400        13,600   

Other noncash items

     (1,900     (100

Changes in assets and liabilities, net of acquired businesses:

    

Accounts receivable

     (9,700     (900

Inventories

     (38,300     (35,100

Current liabilities

     19,600        2,400   

Taxes

     (8,500     7,200   

Other, net

     8,400        (18,100
                

Net cash provided by operating activities

     463,700        434,700   
                

Cash flows from investing activities:

    

Capital expenditures

     (33,300     (37,500

Payments made for purchases of businesses, net of cash acquired

     (286,100     (62,300

Payments made for intangibles

     (3,600     (13,200
                

Net cash used in investing activities

     (323,000     (113,000
                

Cash flows from financing activities:

    

Net change in short-term borrowings

     216,000        —     

Purchase of noncontrolling interest

     (25,900     —     

Proceeds from exercises under share-based compensation plans, net

     13,100        9,900   

Excess tax benefit relating to share-based compensation plans

     6,800        6,000   

Purchase of common stock

     (297,600     (271,900

Dividends paid

     (49,900     (48,900

Other

     (5,200     —     
                

Net cash used in financing activities

     (142,700     (304,900
                

Effect of exchange rate changes on cash and cash equivalents

     (10,200     23,200   
                

(Decrease) increase in cash and cash equivalents during the period

     (12,200     40,000   
                

Balance at January 1

     674,400        592,100   
                

Balance at September 30

   $ 662,200      $ 632,100   
                

Supplemental cash flow information

    

Cash paid for:

    

Interest

   $ 6,300      $ 6,400   

Income taxes

     177,500        150,200   

Non-cash transactions:

    

Purchase of common stock not settled

   $ 4,400      $ —     

Purchase of businesses and related costs

     5,700        2,900   

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

 

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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 C. R. Bard, Inc.’s 2009 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 C. R. Bard, Inc.’s 2009 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 ended August 31, 2010 and August 31, 2009 and as of November 30, 2009. No events occurred related to these foreign subsidiaries during the months of September 2010, September 2009 or December 2009 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.

2. Acquisitions

On July 6, 2010, the company acquired all of the outstanding stock of SenoRx, Inc. (“SenoRx”) for a purchase price of $11.00 per share in cash, totaling $213.5 million. SenoRx was a public company engaged in the manufacture and sale of minimally-invasive medical devices used in the percutaneous diagnosis and treatment of breast cancer. SenoRx’s products expand Bard’s existing biopsy product portfolio to include the EnCor® stereotactic-guided and MRI-guided breast biopsy systems, the Gel Mark® line of breast tissue markers and the Contura® balloon catheter for the treatment of breast cancer. Substantially all of the purchase price for the acquisition was funded through the issuance of commercial paper. The acquisition was accounted for as a business combination, and the results of operations have been included in the company’s results since the acquisition date. The purchase price allocation at fair value resulted in the recognition of: deferred tax assets of $38.3 million, consisting primarily of net operating loss carryforwards; core technologies of $95.1 million; deferred tax liabilities of $43.3 million, primarily associated with core technologies; and other net assets of $24.0 million consisting of cash, accounts receivable and inventories. An indefinite-lived intangible asset of $12.8 million was also recorded primarily for the next generation of the EnCor® stereotactic-guided breast biopsy system. The fair value of this intangible asset was determined based upon the present value of expected future cash flows adjusted for the probability of technological and commercial risk, utilizing a risk-adjusted discount rate. The excess of the purchase price over fair value of the acquired net assets was recorded as goodwill of $86.6 million. The goodwill recognized is attributable to expected cost synergies and other benefits created by the expanded and more comprehensive biopsy product portfolio as a result of the acquisition. The goodwill is not deductible for tax purposes. Core technologies will be amortized over their estimated useful lives of approximately 10 years. The company incurred acquisition related transaction costs of $3.2 million, which were expensed to marketing, selling and administrative expense. The company has not yet finalized the purchase accounting, which may be adjusted as further information about conditions existing at the acquisition date becomes available. In connection with this acquisition, the company recorded charges of $6.9 million ($4.2 million after tax) to other (income) expense, net, associated with the termination of existing SenoRx commercial agreements, the settlement of disputes that arose under certain of these agreements and integration costs.

On May 20, 2010, the company, through its wholly-owned subsidiary, Bard Holdings Limited, acquired the remaining 15% of the common shares that it did not already own of its Malaysian manufacturing operation, Bard Sendirian Berhad, for $25.9 million. In connection with the transaction, Bard’s shareholders’ investment was reduced by $13.2 million, which represented the excess of the cash paid over the carrying amount of the noncontrolling interest.

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

On April 12, 2010, the company acquired all of the outstanding stock of FlowCardia, Inc. (“FlowCardia”), a privately-held company engaged in the design and manufacture of endovascular products used in the treatment of chronic total occlusions (“CTOs”), for total consideration of $80.1 million. FlowCardia’s products complement Bard’s percutaneous transluminal angioplasty products and peripheral stents. FlowCardia’s Crosser® product line of clinically-proven catheters deliver vibrational energy, enabling physicians to cross CTOs and allow for subsequent therapies, such as balloon angioplasty, stent implantation and atherectomy. The acquisition was accounted for as a business combination, and the results of operations have been included in the company’s results since the acquisition date. The purchase price allocation at fair value resulted in the recognition of: deferred tax assets of $17.0 million, consisting primarily of net operating loss carryforwards; core technologies of $46.4 million; deferred tax liabilities of $19.3 million primarily associated with core technologies; and other net assets of $3.0 million. In addition, an indefinite-lived intangible asset of $4.7 million was recorded for follow-on product applications for CTOs. The excess of the purchase price over fair value of the acquired net assets was recorded as goodwill of $28.3 million. The goodwill recognized is attributable to complementary product sales opportunities and expected cost synergies. The goodwill is not deductible for tax purposes. Core technologies will be amortized over their estimated useful lives of approximately 11 years. The company has not yet finalized the purchase accounting, which may be adjusted as further information about conditions existing at the acquisition date becomes available.

3. Restructuring

In April 2009, the company announced a plan (the “Plan”) to reduce its overall cost structure and improve efficiency. The Plan included the consolidation of certain businesses in the United States and the realignment of certain sales and marketing functions outside the United States. The Plan resulted in the elimination of certain positions and other employee terminations worldwide. The company recorded employee separation costs under the company’s existing severance programs and other costs primarily related to one-time termination benefits offered under the Plan. Activities under the Plan were substantially complete as of June 30, 2009, with a total pre-tax cost of $15.4 million ($10.2 million after tax). Substantially all of these costs were cash expenditures. At September 30, 2010, no liability remained for this restructuring charge.

4. Earnings per Common Share

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

 

     Quarter
Ended
September 30,
   Nine Months
Ended
September 30,
     2010    2009    2010    2009
(dollars and shares in millions)                    

EPS Numerator:

           

Net income attributable to common shareholders

   $ 127.5    $ 129.5    $ 373.0    $ 354.2

Less: Income allocated to participating securities

     1.3      1.3      4.1      3.9
                           

Net income available to common shareholders

   $ 126.2    $ 128.2    $ 368.9    $ 350.3
                           

EPS Denominator:

           

Weighted average common shares outstanding

     93.3      97.0      94.4      98.2

Dilutive common share equivalents from share-based compensation plans

     1.0      1.1      1.1      1.3
                           

Weighted average common and common equivalent shares outstanding, assuming dilution

     94.3      98.1      95.5      99.5
                           

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

5. Income Taxes

The company’s effective tax rate for each of the quarters ended September 30, 2010 and 2009 was approximately 30%. The company’s effective tax rate for the nine months ended September 30, 2010 was approximately 31% compared to approximately 30% for the same period in 2009. The effective tax rate for both current year periods reflects the discrete tax effect of a charge of $5.6 million associated with a planned future cash repatriation of approximately $62 million of earnings from operations in certain foreign jurisdictions as a result of tax legislation enacted in the third quarter. The company has not provided for income taxes on the remainder of undistributed earnings of its foreign operations, as it is the company’s intention to continue to permanently reinvest these undistributed earnings. The $5.6 million charge was partially offset by the discrete tax effect of $4.2 million associated with certain tax positions being remeasured as a result of new information related to the U.S. Internal Revenue Service examinations of the tax years 2003 and 2004.

At September 30, 2010, the total amount of liability for unrecognized tax benefits was $52.8 million (of which $44.4 million would impact the effective tax rate, if recognized) plus $13.0 million of accrued interest. At December 31, 2009, the liability for unrecognized tax benefits was $53.2 million plus $11.3 million of accrued interest. Depending upon the outcome of the administrative appeals process related to two tax positions under review for tax years 2003 and 2004, open tax examinations for tax years 2005 through 2007 and/or the expiration of applicable statutes of limitations, the company believes it is reasonably possible that the total amount of unrecognized tax benefits may decrease by up to $20.5 million over the next 12 months.

6. 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 exchange rate movements are generally offset by movements in the underlying hedged item. All of the company’s derivative instruments are designated and qualify as cash flow hedges. For further discussion regarding the company’s use of derivative instruments, see Notes 1 and 6 to the consolidated financial statements in C. R. Bard, Inc.’s 2009 Annual Report on Form 10-K.

A roll forward of the notional value of the company’s forward currency and option contracts is as follows:

 

     Forwards     Options  

(dollars in millions)

    

Balance, December 31, 2009

   $ 52.1      $ 59.6   

New contracts

     86.1        52.3   

Expired/cancelled contracts

     (49.4     (44.7
                

Balance, September 30, 2010

   $ 88.8      $ 67.2   
                

The location and fair values of derivative instruments recognized in the condensed consolidated balance sheet are as follows:

 

             Derivatives  
     Location      September 30,
2010
     December 31,
2009
 
(dollars in millions)                     

Forward currency contracts

     Other current assets       $ 2.6       $ 1.5   

Option contracts

     Other current assets         3.6         0.9   
                    
      $ 6.2       $ 2.4   
                    

Forward currency contracts

     Accrued expenses       $ 0.2       $ —     
                    
      $ 0.2       $ —     
                    

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The following table includes information about gains and losses on derivative instruments and the impact on the condensed consolidated statements of shareholders’ investment:

 

     Gain/(Loss)
Recognized in  Other
Comprehensive

Income
   

Location of

Gain/(Loss) Reclassified

from Accumulated

Other Comp. Loss to
Income

   Gain/(Loss) Reclassified
from Accumulated
Other Comp. Loss
to Income
 
     Quarter Ended
September 30,
       Quarter Ended
September 30,
 
     2010     2009            2010             2009      
(dollars in millions)                              

Forward currency contracts

   $ (0.1   $ 0.1      Costs of goods sold    $ 0.8      $ (0.9

Option contracts

     (1.5     (1.9   Costs of goods sold      0.1        1.4   
                                   
   $ (1.6   $ (1.8      $ 0.9      $ 0.5   
                                   
     Gain/(Loss)
Recognized in  Other
Comprehensive

Income
   

Location of

Gain/(Loss) Reclassified

from Accumulated

Other Comp. Loss to
Income

   Gain/(Loss) Reclassified
from Accumulated
Other Comp. Loss
to Income
 
     Nine Months
Ended

September 30,
       Nine Months
Ended

September 30,
 
     2010     2009        2010     2009  
(dollars in millions)                              

Forward currency contracts

   $ 0.5      $ 1.5      Costs of goods sold    $ (0.3   $ (1.5

Option contracts

     1.7        (7.2   Costs of goods sold      —          4.1   
                                   
   $ 2.2      $ (5.7      $ (0.3 )(A)    $ 2.6 (A) 
                                   

 

(A) The tax effect of the amount reclassified from accumulated other comprehensive loss to income was $0.2 million and $0.4 million at September 30, 2010 and 2009, respectively.

Fair Value of 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 should be determined using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level hierarchy to prioritize the inputs used in measuring fair value. The levels within the hierarchy range from Level 1 having the highest priority to Level 3 having the lowest.

The following table summarizes financial instruments measured at fair value on a recurring basis:

 

     September 30,
2010
     December 31,
2009
 
(dollars in millions)              

Forward currency contracts

   $ 2.4       $ 1.5   

Option contracts

     3.6         0.9   

The fair values of forward currency and option contracts were measured using significant other observable inputs and valued by reference to similar financial instruments, adjusted for restrictions and other terms specific to each contract (Level 2 under the fair value hierarchy).

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Financial Instruments not Measured at Fair Value

The fair value of commercial paper borrowings of $216.0 million at September 30, 2010 approximates carrying value. There were no outstanding borrowings or commercial paper borrowings at December 31, 2009. The company maintains a committed syndicated bank credit facility with a $400 million five-year credit agreement that expires in June 2012. 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.

The fair value of long-term debt was $165.6 million and $163.1 million at September 30, 2010 and December 31, 2009, respectively. These fair values were estimated using dealer quotes for similarly-rated debt instruments over the remaining contractual term of the company’s obligation (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 monitors these receivables for potential collection risks. The company is experiencing significant delays in the collection of accounts receivable associated with the national healthcare system in Greece, which amounted to $30.7 million and $36.7 million, at September 30, 2010 and December 31, 2009, respectively. Due to the continued challenges with the financial stability and creditworthiness of Greece, the company recorded a write-down on these receivables of $3.8 million in the second quarter of 2010. The write-down was based on a proposal that the Greek government announced on June 15, 2010 to settle its outstanding debts from 2007 through 2009, primarily by issuing non-interest bearing bonds with maturities of one to three years. The proposal was adopted as law on August 3, 2010.

7. Inventories

Inventories consisted of:

 

     September 30,
2010
     December 31,
2009
 

(dollars in millions)

     

Finished goods

   $ 181.7       $ 176.2   

Work in process

     25.8         27.1   

Raw materials

     107.8         92.1   
                 
   $ 315.3       $ 295.4   
                 

8. Contingencies

General

In the ordinary course of business, the company is subject to various legal proceedings and claims, including, for example, product liability matters, environmental matters, employment disputes, disputes on agreements and other commercial disputes. In addition, the company operates in an industry susceptible to significant patent legal claims. The company accounts for estimated losses with respect to legal proceedings and claims when such losses are probable and reasonably estimable. 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

 

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more products. If a patent owned by or licensed to the company were to be determined to be invalid or unenforceable, the company might be required to reduce the value of the patent on the company’s balance sheet and to record a corresponding charge, which could be significant in amount. The company believes that any of these 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 October 21, 2010, approximately 1,780 federal and 1,570 state lawsuits involving individual claims by approximately 3,465 plaintiffs, as well as two putative class actions in the United States and four putative class actions in various Canadian provinces, have been filed or asserted against the company with respect to its Composix® Kugel® and certain other hernia repair implant products (collectively, the “Hernia Product Claims”). One of the U.S. class action lawsuits consolidates 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. Approximately 1,545 of the state lawsuits, involving individual claims by a substantially equivalent number of 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. The company voluntarily recalled certain sizes and lots of the Composix® Kugel® products beginning in December 2005.

On June 22, 2007, the Judicial Panel on Multidistrict Litigation transferred Composix® Kugel® lawsuits pending in federal courts nationwide into one Multidistrict Litigation (“MDL”) for coordinated pre-trial proceedings in the United States District Court for the District of Rhode Island. The MDL court subsequently determined to include other hernia repair products of the company in the MDL proceeding. The first MDL trial was completed in April 2010 and resulted in a judgment for the company based on the jury’s finding that the company was not liable for the plaintiff’s damages. The second MDL trial was completed in August 2010 and resulted in a judgment for the plaintiffs of $1.5 million. The company intends to appeal the judgment. The company expects additional trials of a limited number of the Hernia Product Claims to take place over the next 12 months. While the company intends to vigorously defend the Hernia 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.

As of October 21, 2010, approximately 75 product liability lawsuits have been filed or asserted against the company in various federal and state jurisdictions alleging personal injuries associated with the use of the company’s women’s health products, principally its Avaulta® line of pelvic floor reconstruction products (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. With respect to certain of these claims, the company believes that one of its suppliers has an obligation to defend and indemnify the company. On October 12, 2010, the Judicial Panel on Multidistrict Litigation transferred the Women’s Health Product Claims involving Avaulta® products pending in federal courts nationwide into an MDL for coordinated pre-trial proceedings in the United States District Court for the Southern District of West Virginia. Approximately 40 of the Women’s Health Product Claims involving Avaulta® products are pending in federal courts and have been or will be transferred to the MDL, with the remainder of the Women’s Health Product Claims in various state or federal courts. While the company intends to vigorously defend the Women’s Health 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.

As of October 21, 2010, product liability lawsuits involving individual claims by approximately 30 plaintiffs have been filed or asserted against the company in various federal and state jurisdictions alleging personal

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

injuries associated with the use of the company’s vena cava filter products. In addition, a putative class action lawsuit has been filed against the company in California state court on behalf of plaintiffs who are alleged to have no present injury (all lawsuits, collectively, the “Filter Product Claims”). The putative class action, which has not been certified, seeks (i) medical monitoring, (ii) punitive damages, (iii) a judicial finding of defect and causation and/or (iv) attorneys’ fees. While the company intends to vigorously defend the 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, including the Hernia Product Claims, the Women’s Health Product Claims and the Filter Product Claims, 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 the majority 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 the Hernia Product Claims, the Women’s Health Product Claims, the Filter Product Claims and related matters as these cases progress.

The company believes that many settlements and judgments, as well as legal defense costs, relating to the Hernia Product Claims, the Women’s Health Product Claims and the Filter Product Claims are or may be covered in whole or in part under its product liability insurance policies with a limited number of insurance companies. In certain circumstances, insurance companies reserve their rights with respect to coverage, or contest or deny coverage, as has occurred with respect to certain of these 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, may record receivables with respect to amounts due under these policies. Amounts recovered under these policies, however, may be less than the stated coverage limits and may not be adequate to cover damages and/or costs relating to the claims. In addition, there is no guarantee that insurers will pay claims or that coverage will otherwise be available.

Other Legal Matters

On November 27, 2006, the company received a subpoena issued by the U.S. Department of Health and Human Services, Office of Inspector General, under the authority of the federal healthcare fraud and false claims statutes. The subpoena seeks documents related to the company’s brachytherapy business. The company is cooperating with the government’s request and has responded to the subpoena. At this stage of the inquiry, the likelihood of an adverse outcome cannot be assessed. The company cannot give any assurances that this matter will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

On February 21, 2007, Southeast Missouri Hospital (“Southeast”) filed a putative class action complaint on behalf of itself and all others similarly situated against the company and another manufacturer, Tyco International, Inc., which was subsequently dismissed from the action. The complaint was later amended to add St. Francis Medical Center (“St. Francis”) as an additional named plaintiff. The action was re-named as St. Francis Medical Center, et al. v. C. R. Bard, Inc., et al. (Civil Action No. 1:07-cv-00031, United States District Court, Eastern District of Missouri, Southeastern District) when the court denied Southeast’s motion to serve as a class representative and dismissed Southeast from the lawsuit. In September 2008, the court granted St. Francis’s motion for class certification and determined the measurement period for any potential damages. St. Francis alleges that the company conspired to exclude competitors from the urological catheter market and that the company sought to maintain market share by engaging in conduct in violation of state and federal antitrust laws. St. Francis seeks injunctive relief and has presented an expert report that calculates damages of up to approximately $320 million, a figure that the company believes is unsupported by the facts. The company’s expert

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

report establishes that, even assuming a determination adverse to the company, the plaintiffs suffered no damages. In September 2009, the District Court granted the company’s summary judgment motion and dismissed with prejudice all counts in this action. St. Francis appealed the Court’s decision to the Eighth Circuit Court of Appeals. In August 2010, the Eighth Circuit Court of Appeals affirmed the decision of the District Court. In October 2010, the Eighth Circuit Court of Appeals granted St. Francis’s request for a re-hearing of its appeal. The re-hearing is pending. The company intends to defend this matter vigorously. If, however, St. Francis is ultimately successful, any damages awarded under the federal antitrust laws will be subject to statutory trebling and St. Francis’s attorneys would be entitled to an award of reasonable fees and costs. At this time, it is not possible to assess the likelihood of an adverse outcome or determine an estimate, or a range of estimates, of potential damages. The company cannot give any assurances that this matter 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 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 Court ruled that Gore failed to prove that the patent is unenforceable due to inequitable conduct. In March 2009, the U.S. District Court doubled the jury award to approximately $371 million for damages through June 2007. The Court also awarded the company attorneys’ fees of $19 million and prejudgment interest of approximately $20 million. In addition, the 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 U.S. District Court awarded the company approximately $109 million in additional damages for the period from July 2007 through March 2009. The 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. In August 2010, Gore deposited with the Court an additional approximately $139 million, representing Gore’s calculation of royalties for its infringing sales through June 2010. Gore has appealed this matter to the Court of Appeals for the Federal Circuit. Because the company considers this matter a gain contingency, no amounts have been recorded as of September 30, 2010.

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 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 any 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. 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.

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Accruals for product liability and other legal matters amounted to $53.8 million and $47.1 million at September 30, 2010 and December 31, 2009, respectively. The company also recorded receivables from insurance companies for unresolved matters amounting to $50.9 million and $33.1 million at September 30, 2010 and December 31, 2009, respectively.

9. Share-Based Compensation Plans

The company may grant a variety of share-based payments under the 2003 Long Term Incentive Plan of C. R. Bard, Inc., as amended and restated (the “2003 Plan”) and the 2005 Directors’ Stock Award Plan of C. R. Bard, Inc. (the “Directors’ Plan”) to certain directors, officers and employees. The total number of remaining shares at September 30, 2010 that may be issued under the 2003 Plan was 6,020,875 and under the Directors’ Plan was 70,366. Shares remaining under the 2003 Plan include 3,150,000 shares authorized by the shareholders at the Company’s Annual Meeting of Shareholders on April 21, 2010. Awards under the 2003 Plan 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 has two employee stock purchase programs.

Amounts recognized for share-based compensation are as follows:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
      2010     2009         2010             2009      
(dollars in millions)                   

Total cost of share-based compensation plans

   $ 11.3      $ 10.8      $ 38.7      $ 37.4   

Amounts capitalized in inventory and fixed assets

     (0.1     (0.2 )       (0.9     (1.0 )  

Amounts recognized in income for amounts previously capitalized in inventory and fixed assets

     0.3        0.4        1.2        1.3   
                                

Amounts charged against income

   $ 11.5      $ 11.0      $ 39.0      $ 37.7   
                                

The anticipated purchases for 2011 and 2010 under the Management Stock Purchase Program (the “MSPP”) as of July 2010 and July 2009, were approximately 0.2 million shares in each year and the fair value per share related to these purchases was $27.42 and $28.20, respectively. The fair value of the 2010 and 2009 annual MSPP purchases was estimated in July 2010 and July 2009, respectively, using the Black-Scholes model based on the following assumptions: risk-free interest rate of 0.22% and 0.35%, respectively; expected volatility of 20% and 27%, respectively; dividend yield of 0.9% and 0.8%, respectively; and expected life of 0.6 years for both valuations.

As of September 30, 2010, there were approximately $67.4 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 treasury shares to satisfy expected share-based payment arrangements in 2010.

10. Pension and Other Postretirement Benefit Plans

Defined Benefit Pension Plans - The company has both tax-qualified and nonqualified, noncontributory defined benefit pension plans that together cover substantially all domestic and certain foreign employees. These plans provide benefits based upon a participant’s compensation and years of service. The company amended its domestic tax qualified pension plan to provide that new hires, effective January 1, 2011 or later, will no longer be eligible to participate in the company’s defined benefit plan. The company also amended its domestic defined

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

contribution plan to provide for a new annual retirement contribution by the company for new hires beginning January 1, 2011. These amendments are not expected to have a material impact on the company’s results of operations.

The components of net periodic pension expense are as follows:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
         2010             2009             2010             2009      
(dollars in millions)                         

Service cost net of employee contributions

   $ 6.1      $ 5.0      $ 18.4      $ 14.9   

Interest cost

     4.7        4.4        14.2        13.0   

Expected return on plan assets

     (5.5     (5.1     (16.5     (15.2

Amortization

     1.8        0.7        5.2        2.3   
                                

Net periodic pension expense

   $ 7.1      $ 5.0      $ 21.3      $ 15.0   
                                

Other Postretirement Benefit Plan - The company does not provide subsidized postretirement healthcare benefits and life insurance coverage except to a limited number of former employees. As this plan is unfunded, contributions are made as benefits are incurred. The net periodic benefit expense was $0.2 million and $0.3 million for the quarters ended September 30, 2010 and 2009, respectively. The net periodic benefit expense was $0.6 million and $0.7 million for the nine month periods ended September 30, 2010 and 2009, respectively.

11. 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, manufactures, packages, distributes and sells medical, surgical, diagnostic and patient care devices. The company sells a broad, diversified portfolio 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 implanted either temporarily or permanently. 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 infrastructures.

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

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  
(dollars in millions)              

United States

   $ 479.3       $ 442.6       $ 1,398.7       $ 1,298.7   

Europe

     108.2         118.0         346.5         341.1   

Japan

     36.0         29.9         97.6         91.3   

Rest of world

     54.9         46.5         160.3         126.9   
                                   
   $ 678.4       $ 637.0       $ 2,003.1       $ 1,858.0   
                                   

 

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C. R. BARD, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Total net sales by disease state are:

 

     Quarter Ended
September 30,
     Nine Months  Ended
September 30,
 
     2010      2009      2010      2009  
(dollars in millions)              

Vascular

   $ 190.7       $ 173.6       $ 550.6       $ 500.1   

Urology

     179.0         177.5         533.0         515.0   

Oncology

     183.3         171.6         535.6         499.8   

Surgical Specialties

     104.6         93.1         320.0         279.1   

Other products

     20.8         21.2         63.9         64.0   
                                   
   $ 678.4       $ 637.0       $ 2,003.1       $ 1,858.0   
                                   

Other information is:

 

     Quarter Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  
(dollars in millions)              

Depreciation

   $ 13.1       $ 12.6       $ 38.9       $ 38.0   
                                   

Amortization

   $ 14.7       $ 10.9       $ 38.4       $ 31.1   
                                   

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

The company designs, manufactures, packages, distributes and sells medical, surgical, diagnostic and patient care devices. The company sells a broad, diversified portfolio 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 of Asia and Latin America are the company’s fastest growing markets. In general, the company’s products are intended to be used once and then discarded, or implanted either temporarily or permanently. The company reports sales in four major product group categories: vascular, urology, oncology and surgical specialties. The company also has a product group 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 innovative and differentiated products that meet the needs of clinicians and their patients. For the nine months ended September 30, 2010, the company’s research and development (“R&D”) expense, excluding purchased R&D, as a percentage of net sales was 6.6%. The company intends to increase R&D expense as a percentage of net sales up to a range of 9% to 10% over the next three to five years. 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

On July 6, 2010, the company acquired all of the outstanding stock of SenoRx, Inc. (“SenoRx”) for a purchase price of $11.00 per share in cash, totaling $213.5 million. SenoRx was a public company engaged in the manufacture and sale of minimally-invasive medical devices used in the percutaneous diagnosis and treatment of breast cancer. SenoRx’s products expand Bard’s existing biopsy product portfolio to include the EnCor® stereotactic-guided and MRI-guided breast biopsy systems, the Gel Mark® line of breast tissue markers and the Contura® balloon catheter for the treatment of breast cancer. Substantially all of the purchase price for the acquisition was funded through the issuance of commercial paper.

On May 20, 2010, the company, through its wholly-owned subsidiary, Bard Holdings Limited, acquired the remaining 15% of the common shares that it did not already own of its Malaysian manufacturing operation, Bard Sendirian Berhad, for $25.9 million.

On April 12, 2010, the company acquired all of the outstanding stock of FlowCardia, Inc. (“FlowCardia”), a privately-held company engaged in the design and manufacture of endovascular products used in the treatment of chronic total occlusions (“CTOs”), for total consideration of $80.1 million. FlowCardia’s products complement Bard’s percutaneous transluminal angioplasty products and peripheral stents. FlowCardia’s Crosser® product line of clinically-proven catheters deliver vibrational energy, enabling physicians to cross CTOs and allow for subsequent therapies, such as balloon angioplasty, stent implantation and atherectomy.

Results of Operations

Net Sales

Bard’s consolidated net sales for the quarter ended September 30, 2010 increased 6% 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 nine months ended September 30, 2010 increased 8% on a reported basis (7% on a constant currency basis) compared to the same period in the prior year. Net sales “on a constant currency basis” is a non-GAAP

 

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financial 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 ended September 30, 2010 by approximately 40 basis points as compared to the same period in the prior year. Price changes had the effect of decreasing consolidated net sales for the nine months ended September 30, 2010 by approximately 30 basis points as compared to the same period in the prior year. Exchange rate fluctuations had the effect of decreasing consolidated net sales for the quarter ended September 30, 2010 by approximately 2% as compared to the same period in the prior year. Exchange rate fluctuations had the effect of increasing consolidated net sales for the nine months ended September 30, 2010 by approximately 1% 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 for the quarter ended September 30, 2010 of $479.3 million increased 8% compared to $442.6 million in the prior year quarter. International net sales for the quarter ended September 30, 2010 of $199.1 million increased 2% on a reported basis (7% on a constant currency basis) compared to $194.4 million in the prior year quarter. Bard’s United States net sales for the nine months ended September 30, 2010 of $1,398.7 million increased 8% compared to $1,298.7 million in the prior year period. International net sales for the nine months ended September 30, 2010 of $604.4 million increased 8% on a reported basis (6% on a constant currency basis) compared to $559.3 million in the prior year period.

Presented below is a summary of consolidated net sales by disease state.

Product Group Summary of Net Sales

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2010      2009      Change     Constant
Currency
    2010      2009      Change     Constant
Currency
 
(dollars in millions)                                                     

Vascular

   $ 190.7       $ 173.6         10     13   $ 550.6       $ 500.1         10     10

Urology

     179.0         177.5         1     2     533.0         515.0         3     3

Oncology

     183.3         171.6         7     7     535.6         499.8         7     6

Surgical Specialties

     104.6         93.1         12     13     320.0         279.1         15     14

Other

     20.8         21.2         (2 )%      (1 )%      63.9         64.0                  
                                            

Total net sales

   $ 678.4       $ 637.0         6     8   $ 2,003.1       $ 1,858.0         8     7
                                            

Vascular Products - Bard markets a wide range of products for the peripheral vascular market, including endovascular products, electrophysiology products and surgical graft products. The increase in consolidated net sales of vascular products for the quarter and nine months ended September 30, 2010 compared to the prior year periods was due primarily to growth in endovascular products. United States net sales of vascular products for the quarter ended September 30, 2010 increased 20% compared to the prior year quarter. International net sales for the quarter ended September 30, 2010 decreased 2% on a reported basis (increased 4% on a constant currency basis) compared to the prior year quarter. United States net sales for the nine months ended September 30, 2010 increased 12% compared to the prior year period. International net sales for the nine months ended September 30, 2010 increased 8% on a reported basis (7% on a constant currency basis) compared to the prior year period.

Consolidated net sales of endovascular products for the quarter ended September 30, 2010 increased 19% on a reported basis (22% on a constant currency basis) compared to the prior year period (including 9% growth, on both a reported and constant currency basis, from the recently acquired SenoRx biopsy products). Consolidated net sales of endovascular products for the nine months ended September 30, 2010 increased 15% on a reported basis (14% on a constant currency basis) compared to the prior year period (including 3% growth, on both a reported and constant currency basis, from the recently acquired SenoRx biopsy products). Percutaneous transluminal angioplasty balloon catheters, stents and biopsy products were the primary contributors to the growth in this category for the quarter and nine months ended September 30, 2010.

 

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Consolidated net sales of electrophysiology products for the quarter ended September 30, 2010 decreased 12% on a reported basis (8% on a constant currency basis) compared to the prior year quarter. The net sales decrease was driven primarily by a decline in sales of electrophysiology laboratory systems. Consolidated net sales of electrophysiology products for the nine months ended September 30, 2010 increased 2% on both a reported and a constant currency basis compared to the prior year period. The company’s electrophysiology laboratory systems and steerable diagnostic catheters contributed to the increase in the nine month period.

Consolidated net sales of surgical graft products for the quarter ended September 30, 2010 decreased 6% on a reported basis (2% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of surgical graft products for the nine months ended September 30, 2010 decreased 3% on both a reported and a constant currency basis compared to the prior year period.

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. The majority of basic drainage products, StatLock® catheter stabilization products and certain urological specialty products are sold through distributors. The increase in consolidated net sales of urology products for the quarter and nine months ended September 30, 2010 compared to the prior year periods was led by growth in sales of basic drainage products and StatLock® products. Net sales growth in urology products for the nine months ended September 30, 2010 was favorably impacted by the inventory reductions made by distributors during the first half of 2009. United States net sales of urology products for the quarter ended September 30, 2010 were flat compared to the prior year quarter. International net sales of urology products for the quarter ended September 30, 2010 increased 3% on a reported basis (6% on a constant currency basis) compared to the prior year quarter. United States net sales for the nine months ended September 30, 2010 increased 3% compared to the prior year period. International net sales for the nine months ended September 30, 2010 increased 5% on a reported basis (3% on a constant currency basis) compared to the prior year period.

Consolidated net sales of basic drainage products for the quarter ended September 30, 2010 increased 3% on a reported basis (4% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of infection control Foley catheter products for the quarter ended September 30, 2010 increased 3% on both a reported and constant currency basis compared to the prior year quarter. Consolidated net sales of basic drainage products for the nine months ended September 30, 2010 increased 3% on a reported basis (2% on a constant currency basis) compared to the prior year period. Consolidated net sales of infection control Foley catheter products for the nine months ended September 30, 2010 were flat on both a reported and constant currency basis compared to the prior year period. Net sales growth of basic drainage products for the nine months ended September 30, 2010 was favorably impacted by the inventory reductions made by distributors during the first half of 2009.

Consolidated net sales of continence products for the quarter ended September 30, 2010 decreased 5% on a reported basis (3% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of continence products for the nine months ended September 30, 2010 decreased 4% on a reported basis (5% on a constant currency basis) compared to the prior year period. Net sales for the quarter and nine months ended September 30, 2010 were impacted by a decline in sales of surgical continence products, a trend that may continue, partially offset by sales growth in fecal management products.

Consolidated net sales of the StatLock® catheter stabilization product line for the quarter ended September 30, 2010 increased 11% on both a reported and a constant currency basis compared to the prior year quarter. Consolidated net sales of the Statlock® catheter stabilization product line for the nine months ended September 30, 2010 increased 22% on a reported basis (21% on a constant currency basis) compared to the prior year period. Net sales growth of the StatLock® products for the nine months ended September 30, 2010 was favorably impacted by inventory reductions made by distributors during the first half of 2009.

 

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Consolidated net sales of urological specialty products for the quarter ended September 30, 2010 decreased 10% on a reported basis (9% on a constant currency basis) compared to the same period in the prior year. Consolidated net sales of urological specialty products for the nine months ended September 30, 2010 decreased 3% on a reported basis (4% on a constant currency basis) compared to the prior year period. A decline in net sales of brachytherapy products impacted sales of urological specialty products for the quarter and nine months ended September 30, 2010. The company believes that the brachytherapy market has been losing procedural share to alternative therapies, a trend that may continue. The net sales decrease of urological specialty products for the nine months ended September 30, 2010 compared to the prior year period was favorably impacted by the inventory reductions made by distributors during the first half of 2009.

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 frequently for chemotherapy, dialysis access catheters, and vascular access ultrasound devices, which help facilitate the placement of PICCs.

The increase in consolidated net sales for the quarter and nine months ended September 30, 2010 of oncology products compared to the same prior year periods was due primarily to growth in sales of PICCs. Ports, dialysis access catheters and vascular access ultrasound devices also contributed to growth in net sales for the nine month period. United States net sales for the quarter ended September 30, 2010 increased 6% compared to the prior year quarter. International net sales for the quarter ended September 30, 2010 increased 9% on a reported basis (12% on a constant currency basis) compared to the prior year quarter. United States net sales for the nine months ended September 30, 2010 increased 6% compared to the prior year period. International net sales for the nine months ended September 30, 2010 increased 13% on a reported basis (8% on a constant currency basis) compared to the prior year period.

Consolidated net sales of PICCs for the quarter ended September 30, 2010 increased 9% on both a reported basis and a constant currency basis compared to the prior year quarter. For the nine months ended September 30, 2010, net sales of these products increased 9% on a reported basis (8% on a constant currency basis) compared to the prior year period. Consolidated net sales of Ports for the quarter ended September 30, 2010 increased 3% on a reported basis (4% on a constant currency basis) compared to the prior year quarter. For the nine months ended September 30, 2010, net sales of these products increased 6% on both a reported and a constant currency basis compared to the prior year period.

Consolidated net sales of dialysis access catheters for the quarter ended September 30, 2010 increased 9% on a reported basis (10% on a constant currency basis) compared to the prior year quarter. For the nine months ended September 30, 2010, net sales of these products increased 12% on a reported basis (10% on a constant currency basis) compared to the prior year period. Consolidated net sales of vascular access ultrasound devices for the quarter ended September 30, 2010 increased 19% on a reported basis (20% on a constant currency basis) compared to the prior year quarter. For the nine months ended September 30, 2010, net sales of these products increased 16% on a reported basis (15% on a constant currency basis) compared to the prior year period.

Surgical Specialty Products - Surgical specialty products include soft tissue repair, performance irrigation and hemostasis product lines. The increase in consolidated net sales of surgical specialty products for the quarter and nine months ended September 30, 2010 compared to the prior year periods was due primarily to growth in the soft tissue repair products. United States net sales of surgical specialty products for the quarter ended September 30, 2010 increased 15% compared to the prior year quarter. International net sales of surgical specialty products for the quarter ended September 30, 2010 increased 3% on a reported basis (6% on a constant currency basis) compared to the prior year quarter. United States net sales for the nine months ended September 30, 2010 increased 17% compared to the prior year period. International net sales for the nine months ended September 30, 2010 increased 6% on a reported basis (3% on a constant currency basis) compared to the prior year period.

 

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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 September 30, 2010 increased 15% on a reported basis (16% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of soft tissue repair products for the nine months ended September 30, 2010 increased 20% on a reported basis (19% on a constant currency basis) compared to the prior year period. The company’s net sales in this category for the quarter and nine months ended September 30, 2010 were favorably impacted by growth in sales of natural-tissue hernia and breast reconstruction implants and hernia fixation products.

Beginning in December 2005 the company initiated, and later expanded, a voluntary product recall of certain of its Bard® Composix® Kugel® Mesh products intended for ventral hernia repair. In connection with the recall, the FDA conducted several inspections of the company’s Davol, Inc. subsidiary and issued several Form-483 notices and a Warning Letter, each citing observations generally relating to non-conformances in Davol’s quality systems. The company responded to the Form-483 notices and the Warning Letter and, in each case, completed corrective actions to address the observations. In January 2010, the FDA notified the company that the observations relating to its Davol facility contained in the Form-483 notices and the Warning Letter had been satisfactorily resolved and closed out.

In connection with several inspections conducted by the FDA of the company’s manufacturing facility located in Humacao, Puerto Rico, the FDA issued a Form-483 notice in February 2008 and a Warning Letter in July 2008, each citing observations generally relating to non-conformances in the facility’s quality systems. The company responded to the Form-483 notice and the Warning Letter and, in each case, completed corrective actions to address the observations. In April 2010, the FDA notified the company that the observations relating to the Humacao, Puerto Rico facility contained in the Form-483 notice and the Warning Letter had been satisfactorily resolved and closed out. The facility manufactures products for many of the company’s divisions and subsidiaries, including soft tissue repair products for the company’s Davol subsidiary.

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 September 30, 2010 decreased 2% on a reported basis (1% on a constant currency basis) compared to the prior year quarter. Consolidated net sales of other products for the nine months ended September 30, 2010 were flat on both a reported and constant currency basis compared to the prior year period.

Costs and Expenses

The following is a summary of costs and expenses as a percentage of net sales for the quarters and nine months ended September 30:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009(A)     2010(A)          2009(A)      

Cost of goods sold

     37.1     37.8     37.8     37.9

Marketing, selling and administrative expense

     27.4     25.8     27.7     26.8

Research and development expense

     7.0     6.8     6.6     6.5

Interest expense

     0.5     0.5     0.4     0.5

Other (income) expense, net

     1.0     0.1     0.4     0.9
                                

Total costs and expenses

     73.0     70.9     73.0     72.7
                                

 

(A) Amounts do not add due to rounding.

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, amortization of intangible assets and the impact of hedging activities. Cost of goods sold as a percentage of net sales for the quarter ended September 30, 2010

 

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decreased 70 basis points compared to the prior year quarter. Reductions in cost of goods sold were attributed primarily to cost improvements. The impact of incremental amortization of intangible assets acquired in the last 12 months increased cost of goods sold as a percentage of net sales by approximately 80 and 50 basis points over the prior year quarter and nine month period, respectively. Cost of goods sold as a percentage of net sales for the nine months ended September 30, 2010 decreased 10 basis points compared to the prior year period.

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 ended September 30, 2010 were 27.4% compared to 25.8% for the prior year quarter. These costs as a percentage of net sales for the nine months ended September 30, 2010 were 27.7% compared to 26.8% for the prior year period. The increase in marketing, selling and administrative expense was attributed primarily to the acquired operations of SenoRx and Flowcardia.

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 purchased R&D costs arising from the company’s business development activities. Purchased R&D may impact the comparability of the company’s results of operations between periods. Purchased R&D charges of $0.5 million and $2.7 million were recorded for the nine months ended September 30, 2010 and 2009, respectively. Research and development expense for the quarter ended September 30, 2010 was $47.5 million, an increase of approximately 10% compared to the prior year quarter. Research and development expense for the nine months ended September 30, 2010 was $133.2 million, an increase of approximately 10% compared to the prior year period.

Interest expense - Interest expense was $3.2 million and $3.0 million for the quarters ended September 30, 2010 and 2009, respectively. Interest expense was $8.9 million and $9.0 million for the nine months ended September 30, 2010 and 2009, respectively.

Other (income) expense, net - The components of other (income) expense, net, for the quarters and nine months ended September 30 are:

 

     Quarter Ended
September 30,
    Nine Months Ended
September 30,
 
         2010             2009             2010             2009      
(dollars in millions)                         

Interest income

   $ (1.1   $ (0.7   $ (2.7   $ (2.9

Foreign exchange losses (gains)

     (0.8     0.2        0.2        (1.8

Asset disposition

     —          —          —          4.5   

Restructuring

     —          —          —          15.4   

Acquisition related items

     7.7        —          9.3        —     

Other, net

     0.9        1.1        1.9        2.3   
                                

Total other (income) expense, net

   $ 6.7      $ 0.6      $ 8.7      $ 17.5   
                                

Interest income - For the quarter ended September 30, 2010, interest income was $1.1 million compared to $0.7 million for the prior year quarter. For the nine months ended September 30, 2010, interest income was $2.7 million compared to $2.9 million for the same period in the prior year.

Asset disposition - For the nine months ended September 30, 2009, the amount reflects a non-cash charge for an asset write-off related to the company’s decision to discontinue a hernia-repair xenograft device.

Restructuring - See Note 3 to the notes to condensed consolidated financial statements.

Acquisition related items - For the quarter and nine months ended September 30, 2010, the amounts consist of acquisition related integration costs.

 

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Income tax provision

The company’s effective tax rate for each of the quarters ended September 30, 2010 and 2009 was approximately 30%. The company’s effective tax rate for the nine months ended September 30, 2010 was approximately 31% compared to approximately 30% for the same period in 2009. The effective tax rate for both current year periods reflected the discrete tax effect of a charge of $5.6 million associated with a planned future cash repatriation of approximately $62 million of earnings from operations in certain foreign jurisdictions as a result of tax legislation enacted in the third quarter. The $5.6 million charge was partially offset by the discrete tax effect of $4.2 million associated with certain tax positions being remeasured as a result of new information related to the U.S. Internal Revenue Service examinations of the tax years 2003 and 2004.

Net Income Attributable to Common Shareholders and Earnings Per Share Available to Common Shareholders

The company reported net income attributable to common shareholders and diluted earnings per share available to common shareholders for the quarter ended September 30, 2010 of $127.5 million and $1.34, respectively. Net income attributable to common shareholders and diluted earnings per share available to common shareholders for the prior year quarter was $129.5 million and $1.31, respectively. The current year quarter reflects acquisition related items, consisting of transaction costs (primarily legal and valuation costs), integration costs and purchase accounting adjustments of $7.0 million, or $0.07 per diluted share. The current year quarter also reflects a net increase to the income tax provision of $1.4 million, or $0.01 per diluted share, as a result of the planned cash repatriation and the remeasurement of certain tax positions as discussed above.

The company reported net income attributable to common shareholders and diluted earnings per share available to common shareholders for the nine months ended September 30, 2010 of $373.0 million and $3.86, respectively. Net income attributable to common shareholders and diluted earnings per share available to common shareholders for the nine months ended September 30, 2009 was $354.2 million and $3.52, respectively. The current year to date period reflects acquisition related items, consisting of transaction costs (primarily legal and valuation costs), integration costs and purchase accounting adjustments of $14.1 million, or $0.15 per diluted share. The current year nine month period also reflects bad debt expense of $3.8 million or $0.04 per diluted share related to the write-down of accounts receivable in Greece and a net increase to the income tax provision of $1.4 million, or $0.01 per diluted share, as a result of the planned cash repatriation and the remeasurement of certain tax positions as discussed above. The prior nine month period reflects restructuring charges of $10.2 million, or $0.10 per diluted share, a non-cash charge related to an asset write-off of $5.2 million, or $0.05 per diluted share, and acquisition related items of $3.1 million or $0.03 per diluted share, primarily consisting of purchased R&D charges.

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 the company’s 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. The table below summarizes certain liquidity measures for Bard as of September 30:

 

     2010      2009  
(dollars in millions)              

Working capital

   $ 1,001.4       $ 1,207.2   
                 

Current ratio

     2.93/1         5.88/1   
                 

For the nine months ended September 30, 2010 and 2009, net cash provided by operating activities was $463.7 and $434.7 million, respectively.

 

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For the nine months ended September 30, 2010, the company used $323.0 million in cash for investing activities, compared to the $113.0 million used in the prior year period. The current year period reflects payments for acquisitions of $286.1 million, primarily for the purchase of SenoRx and FlowCardia. The prior year period included contingent milestone payments of $42.0 million associated with the acquisition of assets of the LifeStent® family of stents from Edwards Lifesciences. Capital expenditures were approximately $33.3 million and $37.5 million for the nine month periods ended September 30, 2010 and 2009, respectively.

For the nine months ended September 30, 2010, the company used $142.7 million in cash for financing activities, compared to the $304.9 million used in the prior year period. The current year period includes the purchase of the noncontrolling interest in Malaysia for $25.9 million. Total debt was $365.8 million and $149.8 million at September 30, 2010 and December 31, 2009, respectively. Total debt to total capitalization was 14.1% and 6.4% at September 30, 2010 and December 31, 2009, respectively. The company spent approximately $297.6 million to repurchase 3,658,250 shares of common stock in the nine months ended September 30, 2010 compared with approximately $271.9 million to repurchase 3,646,147 shares of common stock in the prior year period. The company paid cash dividends of $0.52 per share and $0.49 per share for the nine month periods ended September 30, 2010 and 2009, respectively.

The company maintains a committed syndicated bank credit facility with a $400 million five-year credit agreement that expires in June 2012. 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. The company had outstanding commercial paper borrowings of $216 million at September 30, 2010. There were no outstanding borrowings or commercial paper borrowings at December 31, 2009.

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, 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 8 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 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 a replacement 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 C. R. Bard, Inc.’s 2009 Annual Report on Form 10-K. There have been no significant changes to the company’s critical accounting policies since December 31, 2009.

 

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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-enhancing medical devices. These devices are often used on, or permanently or temporarily implanted in, patients in clinically demanding circumstances, such as operating 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 C. R. Bard, Inc.’s 2009 Annual Report on Form 10-K and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.

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, 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 with 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 maintain or increase research and development expenditures;

 

   

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

 

   

the ability to maintain our effective tax rate and uncertainty related to tax audits, appeals and litigation;

 

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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;

 

   

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 company facility, which could render the company unable to manufacture one or more products (as the company may utilize only one manufacturing facility for certain of its major 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; and

 

   

the ability to recover for claims made to our insurance companies.

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 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;

 

   

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;

 

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

 

   

performance, efficacy 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 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;

 

   

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 or 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 intellectual property rights;

 

   

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;

 

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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 certain countries in southern 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 Item 7A. in C. R. Bard, Inc.’s 2009 Annual Report on Form  10-K. There have been no material changes in the information reported since the year ended December 31, 2009.

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 September 30, 2010. Based upon that evaluation, the company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2010, 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.

 

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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 and claims, including, for example, product liability matters, environmental matters, employment disputes, disputes on agreements and other commercial disputes. In addition, the company operates in an industry susceptible to significant patent legal claims. The company accounts for estimated losses with respect to legal proceedings and claims when such losses are probable and reasonably estimable. 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 were to be determined to be invalid or unenforceable, the company might be required to reduce the value of the patent on the company’s balance sheet and to record a corresponding charge, which could be significant in amount. The company believes that any of these 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 October 21, 2010, approximately 1,780 federal and 1,570 state lawsuits involving individual claims by approximately 3,465 plaintiffs, as well as two putative class actions in the United States and four putative class actions in various Canadian provinces, have been filed or asserted against the company with respect to its Composix® Kugel® and certain other hernia repair implant products (collectively, the “Hernia Product Claims”). One of the U.S. class action lawsuits consolidates 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. Approximately 1,545 of the state lawsuits, involving individual claims by a substantially equivalent number of 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. The company voluntarily recalled certain sizes and lots of the Composix® Kugel® products beginning in December 2005.

On June 22, 2007, the Judicial Panel on Multidistrict Litigation transferred Composix® Kugel® lawsuits pending in federal courts nationwide into one Multidistrict Litigation (“MDL”) for coordinated pre-trial proceedings in the United States District Court for the District of Rhode Island. The MDL court subsequently determined to include other hernia repair products of the company in the MDL proceeding. The first MDL trial was completed in April 2010 and resulted in a judgment for the company based on the jury’s finding that the company was not liable for the plaintiff’s damages. The second MDL trial was completed in August 2010 and resulted in a judgment for the plaintiffs of $1.5 million. The company intends to appeal the judgment. The company expects additional trials of a limited number of the Hernia Product Claims to take place over the next 12 months. While the company intends to vigorously defend the Hernia 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.

As of October 21, 2010, approximately 75 product liability lawsuits have been filed or asserted against the company in various federal and state jurisdictions alleging personal injuries associated with the use of the company’s women’s health products, principally its Avaulta® line of pelvic floor reconstruction products (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. With respect to certain of these claims, the

 

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company believes that one of its suppliers has an obligation to defend and indemnify the company. On October 12, 2010, the Judicial Panel on Multidistrict Litigation transferred the Women’s Health Product Claims involving Avaulta® products pending in federal courts nationwide into an MDL for coordinated pre-trial proceedings in the United States District Court for the Southern District of West Virginia. Approximately 40 of the Women’s Health Product Claims involving Avaulta® products are pending in federal courts and have been or will be transferred to the MDL, with the remainder of the Women’s Health Product Claims in various state or federal courts. While the company intends to vigorously defend the Women’s Health 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.

As of October 21, 2010, product liability lawsuits involving individual claims by approximately 30 plaintiffs have been filed or asserted 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, a putative class action lawsuit has been filed against the company in California state court on behalf of plaintiffs who are alleged to have no present injury (all lawsuits, collectively, the “Filter Product Claims”). The putative class action, which has not been certified, seeks (i) medical monitoring, (ii) punitive damages, (iii) a judicial finding of defect and causation and/or (iv) attorneys’ fees. While the company intends to vigorously defend the 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, including the Hernia Product Claims, the Women’s Health Product Claims and the Filter Product Claims, 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 the majority 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 the Hernia Product Claims, the Women’s Health Product Claims, the Filter Product Claims and related matters as these cases progress.

The company believes that many settlements and judgments, as well as legal defense costs, relating to the Hernia Product Claims, the Women’s Health Product Claims and the Filter Product Claims are or may be covered in whole or in part under its product liability insurance policies with a limited number of insurance companies. In certain circumstances, insurance companies reserve their rights with respect to coverage, or contest or deny coverage, as has occurred with respect to certain of these 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, may record receivables with respect to amounts due under these policies. Amounts recovered under these policies, however, may be less than the stated coverage limits and may not be adequate to cover damages and/or costs relating to the claims. In addition, there is no guarantee that insurers will pay claims or that coverage will otherwise be available.

Other Legal Matters

On November 27, 2006, the company received a subpoena issued by the U.S. Department of Health and Human Services, Office of Inspector General, under the authority of the federal healthcare fraud and false claims statutes. The subpoena seeks documents related to the company’s brachytherapy business. The company is cooperating with the government’s request and has responded to the subpoena. At this stage of the inquiry, the likelihood of an adverse outcome cannot be assessed. The company cannot give any assurances that this matter will not have a material adverse effect on the company’s business, results of operations, financial condition and/or liquidity.

On February 21, 2007, Southeast Missouri Hospital (“Southeast”) filed a putative class action complaint on behalf of itself and all others similarly situated against the company and another manufacturer, Tyco International, Inc., which was subsequently dismissed from the action. The complaint was later amended to add St. Francis Medical Center (“St. Francis”) as an additional named plaintiff. The action was re-named as St. Francis Medical Center, et al. v. C. R. Bard, Inc., et al. (Civil Action No. 1:07-cv-00031, United States District Court, Eastern District of Missouri, Southeastern District) when the court denied Southeast’s motion to serve as a class

 

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representative and dismissed Southeast from the lawsuit. In September 2008, the court granted St. Francis’s motion for class certification and determined the measurement period for any potential damages. St. Francis alleges that the company conspired to exclude competitors from the urological catheter market and that the company sought to maintain market share by engaging in conduct in violation of state and federal antitrust laws. St. Francis seeks injunctive relief and has presented an expert report that calculates damages of up to approximately $320 million, a figure that the company believes is unsupported by the facts. The company’s expert report establishes that, even assuming a determination adverse to the company, the plaintiffs suffered no damages. In September 2009, the District Court granted the company’s summary judgment motion and dismissed with prejudice all counts in this action. St. Francis appealed the Court’s decision to the Eighth Circuit Court of Appeals. In August 2010, the Eighth Circuit Court of Appeals affirmed the decision of the District Court. In October 2010, the Eighth Circuit Court of Appeals granted St. Francis’s request for a re-hearing of its appeal. The re-hearing is pending. The company intends to defend this matter vigorously. If, however, St. Francis is ultimately successful, any damages awarded under the federal antitrust laws will be subject to statutory trebling and St. Francis’s attorneys would be entitled to an award of reasonable fees and costs. At this time, it is not possible to assess the likelihood of an adverse outcome or determine an estimate, or a range of estimates, of potential damages. The company cannot give any assurances that this matter 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 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 Court ruled that Gore failed to prove that the patent is unenforceable due to inequitable conduct. In March 2009, the U.S. District Court doubled the jury award to approximately $371 million for damages through June 2007. The Court also awarded the company attorneys’ fees of $19 million and prejudgment interest of approximately $20 million. In addition, the 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 U.S. District Court awarded the company approximately $109 million in additional damages for the period from July 2007 through March 2009. The 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. In August 2010, Gore deposited with the Court an additional approximately $139 million, representing Gore’s calculation of royalties for its infringing sales through June 2010. Gore has appealed this matter to the Court of Appeals for the Federal Circuit. Because the company considers this matter a gain contingency, no amounts have been recorded as of September 30, 2010.

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 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 any 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. 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.

 

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Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Part I, Item 1A. in C. R. Bard, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and in Part II, Item 1A. “Risk Factors” in C. R. Bard, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.

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

 

    Issuer Purchases of Equity Securities  

Period

  Total
Number
of Shares
Purchased(1)(2)
    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)
 

July 1 - July 31, 2010

    50,313      $ 77.96        50,000      $ 571,130,154   

August 1 - August 31, 2010

    583,912        79.10        550,000        527,682,376   

September 1 - September 30, 2010

    288,215        79.57        287,700        504,789,113   
                               

Total

    922,440      $ 79.18        887,700      $ 504,789,113   
                               

 

(1) The company repurchased 34,740 shares during the three month period ended September 30, 2010 that were not part of the publicly announced share repurchase authorization. These shares were purchased from employees to satisfy tax withholding requirements on the vesting of restricted shares from equity-based awards.

 

(2) On April 15, 2009, the Board of Directors approved the repurchase of up to $500 million of common stock of the company. On June 9, 2010, the Board of Directors approved an additional repurchase of up to $500 million of common stock.

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

 

(a) Exhibit 12.1 – Computation of Ratio of Earnings to Fixed Charges
(b) Exhibit 31.1 – Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
(c) Exhibit 31.2 – Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
(d) Exhibit 32.1 – Section 1350 Certification of Chief Executive Officer
(e) Exhibit 32.2 – Section 1350 Certification of Chief Financial Officer
(f) 101.INS     XBRL Instance Document
(g) 101.SCH    XBRL Taxonomy Extension Schema Document
(h) 101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
(i) 101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
(j) 101.LAB    XBRL Taxonomy Extension Label Linkbase Document
(k) 101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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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: October 25, 2010

   
   

/s/    TODD C. SCHERMERHORN        

   

Todd C. Schermerhorn

Senior Vice President and

Chief Financial Officer

   
   

/s/    FRANK LUPISELLA JR.        

   

Frank Lupisella Jr.

Vice President and Controller

INDEX TO EXHIBITS

 

Number   
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
32.2    Section 1350 Certification of Chief Financial Officer
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

 

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