) posted adjusted earnings per share from continuing operations
of 91 cents for the third quarter of fiscal 2013, flat year over
year. However, earnings beat the Zacks Consensus Estimate by a
penny. Adjusted earnings exclude one-time items such as
tax-related expenses, restructuring and acquisition related
For the quarter under review, net income from continuing
operations (as reported) inched up 1.3% to $400 million (or 85
cents a share) from $395 million (or 81 cents) in the prior-year
Covidien successfully completed the divestment of its
Pharmaceutical unit in the third quarter, which has been
accounted in the discontinued part of the company's results.
Revenues in the third quarter increased 3% (up 5% in constant
currency) to $2,578 million, driven by higher sales in the
Medical Devices segment. Sales were slightly below the Zacks
Consensus Estimate of $2,587 million.
On a geographic basis, revenues in the U.S. market decreased 3%
to $1,299 million. International sales climbed 10% (up 14% in
constant currency) to $1,279 million, driven by emerging market
Revenues from the larger Medical Devices segment grew 4% (up 6%
in constant currency) to $2,139 million. The division is
benefiting from new product offerings and higher volumes.
Within Medical Devices, revenues from Endomechanical Instruments
increased 5% to $632 million, led by solid gains from Tri-Staple
reloads. Sales of Soft Tissue Repair products inched down 1% to
$224 million, as soft sales of biologic mesh mitigated
double-digit growth of synthetic mesh. Further, Airway &
Ventilation sub-segment sales rose 4% to $192 million.
Revenues from Energy Devices climbed 8% to $355 million, again
reflecting strong double-digit vessel sealing sales. Revenues
from Oximetry and Monitoring sub-segment rose 13% to $237
million, owing to higher sales of sensors acquired from Oridion.
However, Vascular product sales inched down 1% to $415 million,
as solid growth of chronic venous insufficiency offerings was
dampened by depressed compression and dialysis products sales.
Sales from Medical Supplies segment inched down 1% to $439
million in the quarter as increased sales of Nursing Care
offerings was offset by soft SharpSafety, Medical Surgical and
OEM product sales.
On an adjusted basis, gross margin dropped 100 bps to 59.5% in
the quarter due to unfavorable foreign exchange rates. Selling,
general and administrative expenses increased 3.1% to $853
million in the reported quarter due to foreign exchange
fluctuations, the medical device excise tax as well as sales and
marketing initiatives in emerging markets, partially offset by
improved productivity. R&D expenses grew 3.2% to $129
million. Adjusted operating margin dipped 160 bps to 21.5% in the
Covidien repurchased roughly 9.4 million ordinary shares under
its share buyback program in the third quarter. Shares
outstanding at the end of quarter were $469 million.
Covidien's mixed third-quarter results keep us on the sideline.
Although the company is gaining significant grounds in emerging
markets, tepid growth in the U.S. is a matter of concern.
Further, the lack of a guidance (which the company suspended due
to the divestment of the Pharmaceutical segment) lowers
visibility on the stock.
The company is adequately placed to achieve its long-term
revenues and earnings growth targets based on its attractive
fundamentals, strategic R&D investment, effective execution,
new product cycle and expansion into the emerging markets. It is
also enhancing shareholder value through dividends and share
repurchases, leveraging healthy free cash flow and strong
However, Covidien faces stiff competition and remains exposed to
pricing and utilization headwinds, along with acquisition risks.
In addition, foreign exchange translation is expected to dampen
Covidien currently carries a Zacks Rank #3 (Hold). Other
), are expected to do well in the medical industry. Hospira
carries a Zacks Rank #1 (Strong Buy), while the other two stocks
carry a Zacks Rank #2 (Buy).
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