), a large-cap medical technology company, reported its adjusted
earnings per share (from continuing operations) of $1.07 for the
third quarter of fiscal 2012, a penny above the Zacks Consensus
Estimate and 6 cents higher than the year-ago quarter earnings.
Adjusted earnings exclude one-time items and extraordinary
Profits from continuing operations decreased 15% to $453 million
(or 93 cents a share) due to higher income tax-related expenses and
Revenues for the third quarter of 2012 rose 3% year over year to
$3,007 million. However, sales were lower than the Zacks Consensus
Estimate of $3,012 million. Currency exchange rate negatively
impacted quarterly revenue by 3%.
On a geographic basis, revenues in the U.S. market rose 6% to
$1,680 million while international sales dropped 1% to $1,327
million. Strengthening U.S. dollar and a soft European economy
affected international sales in the quarter. However, excellent
revenues from emerging markets contributed positively to top-line
Revenues from the larger Medical Devices segment increased 4%
year over year to $2,063 million, driven by double-digit growth
across Vascular and Energy Devices product lines. New products and
higher volume contributed to growth.
Within Medical Devices, revenues from Endomechanical Instruments
increased 1% to $600 million helped by stapling products (including
Tri-Staple). Revenues from Energy Devices soared 10% to $330
million boosted by strong vessel sealing sales. Sales of Soft
Tissue Repair products inched down 1% to $226 million, as growth in
the sutures and mesh products were masked by lower mechanical
Revenues from Oximetry and Monitoring sub-segment remained flat
year over year at $210 million owing to higher sales of monitors
and sensors. Vascular product sales jumped 14% to $418 million,
backed by outstanding growth across peripheral vascular and
neurovascular offerings. Moreover, Airway & Ventilation
sub-segment sales edged up 1% to $184 million led by higher
Revenues from Covidien's Pharma segment remained flat year over
year at $501 million. Robust gains in the Specialty Pharmaceuticals
business were offset by lower Contrast Product
Specialty Pharmaceuticals sales surged 21% to $145 million
spurred by solid revenue from Exalgo and Pennsaid products. Active
Pharmaceutical Ingredients sales increased 3% as a result of higher
narcotics sales but Contrast Product sales plunged 18% due to delay
in customer order timing and sluggish U.S. markets. Revenues from
Radiopharmaceuticals increased 1% on the back of healthy generator
Sales from Medical Supplies segment were virtually flat year
over year at $443 million in the third quarter as higher sales of
Medical Surgical and Nursing Care products were offset by lower
revenues from SharpSafety and Original Equipment Manufacturing
Gross margin improved to 57.8% in the third quarter from 57.1%
in the year-ago comparable period. On an adjusted basis, gross
margin increased to 58% from 57.1% in the prior year-quarter. The
improvement was attributable to lower manufacturing costs and a
favorable business mix. Adjusted operating margin stood at 22.5%
compared with 22.1% a year ago.
The company plans to expand in emerging markets and hence it has
increased its selling, general and administrative (SG&A) and
research and development (R&D) spending. Selling, general and
administrative expenses were higher at 31.1% of sales in the
reported quarter compared with 30.3% of sales in the year-ago
SG&A expenses were partially offset by productivity gains.
R&D expense increased to 5.3% of revenues versus 4.7% in the
Covidien is a leading global health care products company with a
history of developing and manufacturing high-quality products in a
cost-effective manner. The company boasts of a well-diversified
product and technology portfolio. Covidien's larger Medical Device
unit overlaps with the business of its competitors like
Johnson & Johnson
Covidien is expanding its footprint in emerging markets, notably
in Asia and Latin America, and boosting market share in core
segments through investments in sales and marketing infrastructure.
The company is on an acquisition spree and scooped up companies
like BARRX, Newport Medical Instruments, superDimension, PolyTouch
Medical in 2012 alone.
Recently, it completed its acquisition of Israel-based medical
devices firm Oridion Systems Ltd. in late June 2012 to expand its
foothold in emerging markets.
Mallinckrodt, the Pharmaceuticals business of Covidien teamed up
Horizon Pharma, Inc.
) to promote DUEXIS in the U.Sin the quarter.It also agreed to
co-endorse a prescription medicine called the Sumavel DosePro for
) in the U.S. Management at Covidien believes that the co-promotion
agreements represent a key opportunity for its pharmaceuticals
business as Mallinckrodt prepares to spin-off next year, as
announced in December 2011.
Moreover, Covidien continues to roll out new products and
technologies, focusing on faster-growing products and markets and
broadening its product range through acquisitions and strategic
collaborations.In May, Covidienlaunched two products viz. the
HALO90 ULTRA Ablation Catheter in the U.S. and Europe and the Endo
GIA Radial Reload aided with Tri-Staple technology.
In June, the company introduced the Nellcor SpO2 in selected
regions for treatment of respiratory ailments and also launched the
world's first knotless suturing device named V-Loc.
Covidien is also enhancing shareholder value through dividends
and share repurchases, leveraging healthy free cash flows and
strong earnings power. Moreover, the company is restructuring its
three business units to boost cost structure. Cost savings from
restructuring should help offset raw material price inflation and
improve margins and profitability.
Covidien is well placed to achieve its long-term revenue and
earnings growth targets based on its attractive fundamentals,
effective execution, new product cycle, synergies of acquisitions
and expansion into emerging markets. Moreover, its share buyback
initiative is accretive to earnings.
However, sustained pricing/procedure volume pressure,
fluctuating foreign exchange rates, a sluggish U.S. and European
economy represents major headwinds. Our Neutral recommendation on
the stock carries a short-term Zacks #4 Rank (Sell).
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