Covidien plc. (COV), a large-cap medical technology company, reported its adjusted earnings per share (from continuing operations) of $1.02 for the fourth quarter of fiscal 2012, 2 cents above the Zacks Consensus Estimate but 6 cents lower than the year-ago quarter earnings.
Adjusted earnings exclude one-time items such as acquisitions-related expenses, restructuring and related charges along with extraordinary expenses associated with the divestment of the Pharmaceutical segment and impairment charges resulting from the discontinuation of the Duet product line.
For the quarter under review, profit from continuing operations inched up 0.9% to $464 million (or 96 cents a share).
For fiscal 2012, Covidien reported adjusted earnings per share (from continuing operations) of $4.26, 2 cents above the Zacks Consensus Estimate and 29 cents higher than the year-ago fiscal earnings. Adjusted earnings exclude one-time items and extraordinary charges. Profits from continuing operations increased 1% to $1,902 million (or $3.92 a share).
Revenues for the fourth quarter of 2012 dropped 3% year over year to $3,001 million. Sales were above the Zacks Consensus Estimate of $2,992 million. Currency exchange rates negatively impacted quarterly revenue by 3%. Sales were also affected by the inclusion of an extra selling week in the year-ago quarter, which lowered revenues by 7% to 8%.
On a geographic basis, revenues in the U.S. market inched down 1% to $1,668 million and international sales dropped 5% (up 2% in constant currency) to $1,333 million.
For fiscal 2012, revenues grew 2% to $11, 852 million, beating the Zacks Consensus Estimate of $11,842 million. Sales were adversely affected by unfavorable currency fluctuations and the inclusion of an extra selling week in fiscal 2012.
Revenues from the larger Medical Devices segment decreased 1% (up 2% in constant currency) year over year to $2,060 million. Among other factors, product recall and end-market headwinds offset higher sales from new offerings such as Sonicision cordless ultrasonic dissection device, Solitaire FR revascularization device and the Pipeline embolization device.
Within Medical Devices, revenues from Endomechanical Instruments dropped 7% to $578 million as soft surgical instruments sales more than offset solid Tri-Staple sales. The recall of the Duet product line and pricing pressure affected surgical instruments sales in the quarter.
Sales of Soft Tissue Repair products declined 6% to $216 million, as growth in the mesh and bio-surgery products were masked by lower mechanical fixation sales. Further, Airway & Ventilation sub-segment sales dipped 3% to $193 million.
Revenues from Energy Devices climbed 6% to $336 million, boosted by strong vessel sealing sales. Revenues from Oximetry and Monitoring sub-segment increased 2% to $230 million, owing to higher sales of monitors and sensors. Moreover, Vascular product sales grew 4% to $407 million, backed by outstanding growth across neurovascular offerings.
Revenues from Covidien’s Pharma segment edged down 1% (up 2% in constant currency) to $502 million. Robust gains in the Specialty Pharmaceuticals business were offset by lower Contrast Product and Radiopharmaceuticals sales.
Specialty Pharmaceuticals sales surged 11% to $152 million spurred by solid revenue from the Exalgo product. Active Pharmaceutical Ingredients sales increased 3% as a result of higher sales of peptides but Contrast Product sales dropped 8% due to the sluggish U.S. markets. Revenues from Radiopharmaceuticals plunged 10% due to soft sales in the U.S. and Europe.
Sales from Medical Supplies segment declined 9% (down 8% in constant currency) to $439 million in the quarter due to lower revenues from SharpSafety and Original Equipment Manufacturing (“OEM”) offerings.
Gross margin were 55.6% in the fourth quarter compared to 56.5% in the year-ago comparable period. On an adjusted basis, gross margin was 56.5% versus 56.7% in the prior year-quarter. Unfavorable currency fluctuation offset lower manufacturing costs and a favorable business mix. Adjusted operating margin stood at 21.2% compared with 22.3% a year ago.
Selling, general and administrative expenses were higher at 31% of sales in the reported quarter compared with 30.5% of sales in the year-ago quarter. R&D expense decreased to 5.1% of revenues versus 5.4% in the prior-year period.
Covidien repurchased roughly 9.6 million ordinary shares under its share buyback program in the fourth quarter of 2012.
Covidien is a leading global health care products company with an impressive 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 (JNJ), Becton Dickinson (BDX) and C.R. Bard (BCR).
Covidien continues to expand both organically as well as inorganically. The company is adequately placed to achieve its long-term revenue and earnings growth targets based on its attractive fundamentals, strategic acquisitions, effective execution, new product cycle and expansion into emerging markets. It is also enhancing shareholders’ value through dividends and share repurchases, leveraging healthy free cash flows and strong earnings power.
Moreover, Covidien’s recent acquisitions are in tandem with its strategy to invest in products that can offer global competitive advantage. In October, Covidien completed the acquisition of CNS Therapeutics, Inc., a St. Paul Minnesota-based specialty pharmaceutical company. The inclusion of CNS Therapeutic’s marketed products along with its solid product pipeline should boost Mallinckrodt’s pain management branded product portfolio.
However, Covidien faces stiff competition and remains exposed to pricing, utilization headwinds, along with acquisition risks. We remain concerned about the tepid U.S. health services industry and the soft European economy, which has led to fluctuating share prices.
Moreover, the company has been plagued by product recalls. Also, foreign exchange translation is expected to dampen sales growth. We currently have a long-term Neutral recommendation on the stock, which carries a short-term Zacks #3 Rank (Hold).
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