) posted first-quarter fiscal 2014 adjusted earnings per share
from continuing operations of $1.00, up 3.09% year over year and
6 cents ahead of the Zacks Consensus Estimate. Despite facing
headwinds from foreign exchange movements, the medical device
excise tax and escalated investments in emerging markets, the
company managed to deliver a modest positive surprise.
However, reported net income decreased 12.72% to $398 million
(or 87 cents a share) from $456 million (or 96 cents) in the
Total revenues in the first quarter grew 2.80% (up 5% in
constant currency) to $2,639 million, exceeding the Zacks
Consensus Estimate by 1.42%. On a geographic basis, revenues in
the U.S. market increased 2.99% to $1307 million. On the other
hand, international revenues increased 2.62% to $1,332 million,
driven by growth of 11.48% in emerging markets.
On an adjusted basis, first-quarter gross margin dropped 50
basis points (bps) to 59.4% in the quarter due to increased
manufacturing costs partially offset by positive pricing along
with favorable volume and mix.
Selling, general and administrative expenses scaled up 3.41%
to $850 million on account of the medical device excise tax and
sales and marketing initiatives in emerging markets, partially
offset by improved productivity. Research and Development
(R&D) expenses escalated 12.61% to $125 million in the
Adjusted operating income dropped 0.83% to $599 million.
Adjusted operating margin dipped 80 bps to 22.7% in the
Revenues from the Surgical Solutions rose 5.61% (up 8% in
constant currency) to $1,261 million in the quarter. It is
benefiting from new product offerings and higher volumes.
Within Sugical Solutions, revenues from Advanced Surgical
escalated 7.97% to $853 million, led by solid gains from vessel
sealing products, stapling products and Tri-Staple reloads.
Revenues from General Surgical rose by merely 0.99% to $408
million, led by improved suture sales.
Revenues from Vascular therapies grew 2.16% to $425 million
(up 5% in constant currency). Within it, the revenues from
Peripheral Vascular were up 1.61% to $315 million primarily due
to striking growth of chronic venous insufficiency products.
Revenues from Neurovascular segment were up 3.77% to $110
million, driven by increased sales of coils.
On the other hand, revenues from the Respiratory and Patient
Careslipped 0.42% (up 2% in constant currency) to $953 million in
the quarter. Within Respiratory and Patient Care, the Patient
Monitoring business was up 3.73% to $250 million driven by
increased sales of capnography products and sensors. The Airway
& Ventilation was down 7.14% to $182 million.
A considerable decline in the sales of ventilators acted as a
headwind. A rise in the sales of enteral feeding products
accelerated revenues from Nursing Care, which was up 1.97% to
$259 million. The Patient Care business was down 1.50% to
$262 million as a rise in the sales of OEM products was partially
offset by decline in the sales of SharpSafety products.
Covidien repurchased roughly 4.5 million ordinary shares under
its share buyback program in the third quarter of fiscal 2013.
Shares outstanding at the end of the quarter were $456
Covidien reiterated its outlook for fiscal 2014. Covidien expects
revenues to grow 2-5% year over year at constant exchange rate
(CER) for fiscal 2014. The current Zacks Consensus Estimate of
$10,604 million remains within the company-provided guidance
However, the company has updated its fiscal 2014 tax rate
guidance. Covidien expects the effective tax rate for 2014 to be
within 16.5% to 17.5%. The range includes the impact of foreign
exchange at current rates and excludes the impact of one-time
Moving ahead, adjusted operating margin is likely to remain in
the band of 21.5-22.5% and effective tax rate in the range of
16.0-17.0%. Moreover, Covidien is aiming a dividend payout ratio
in excess of 35% over time and is targeting to achieve a ratio of
at least 30% within the next 12 months.
We are encouraged by Covidien's performance in the first
quarter of fiscal 2014. The company is actively implementing its
strategies of innovation, customer-focused portfolio management,
emerging markets' growth and driving operational
leverage.Although the company is gaining significant grounds in
the emerging markets, tepid growth in the U.S. is a matter of
Moreover, Covidien's bottom line remains under pressure due to
escalated investments in emerging markets and headwinds from
foreign exchange fluctuations. In addition, Covidien faces stiff
competition and remains exposed to pricing and utilization
headwinds, along with acquisition risks.
However, the company is adequately placed to achieve its
long-term revenue and earnings growth targets based on its
attractive fundamentals, strategic R&D investment, effective
execution, new product cycle and expansion plans for the emerging
markets. It is also consistently enhancing shareholder value
through dividends and share repurchases, leveraging healthy free
cash flow and strong earnings power.
Covidien currently carries a Zacks Rank #1 (Strong Buy). Other
top-ranked companies like
Cardiovascular Systems Inc.
Mead Johnson Nutrition Co.
) are also expected to do well in the medical products industry.
While NuVasive and Cardiovascular Systems sport the same Zacks
Rank as Covidien, Mead Johnson Nutrition Company carries a Zacks
Rank #2 (Buy).
COVIDIEN PLC (COV): Free Stock Analysis
CARDIOVASCLR SY (CSII): Free Stock Analysis
MEAD JOHNSON NU (MJN): Free Stock Analysis
NUVASIVE INC (NUVA): Free Stock Analysis
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