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Covidien's 1Q Beats, Raises View

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Covidien plc. (COV) reported its adjusted earnings per share of $1.10 for the first quarter of fiscal 2013, 4 cents above the Zacks Consensus Estimate but 3 cents lower than the year-ago quarter earnings.

Adjusted earnings exclude one-time items such as tax-related expenses, restructuring and related charges along with extraordinary expenses associated with the divestment of the Pharmaceutical segment.

For the quarter under review, net income was flat year-over-year at $493 million (or $1.03 a share) due to higher expenses, which dampened solid sales growth.

Covidien’s core Medical Devices is growing at a healthy pace, particularly in certain key categories. Moreover, the company is gaining considerable traction in emerging markets, led by its portfolio reshaping initiatives toward high-growth/high-margin businesses. The company remains on track regarding the spin-off of its Pharmaceutical business by mid-2013.


Revenues for the first quarter of 2013 increased 5% year over year to $3,056 million, primarily led by higher sales in the Medical Devices segment. Sales were above the Zacks Consensus Estimate of $2,996 million. Currency exchange rates negatively impacted quarterly revenue by 1%.

On a geographic basis, revenues in the U.S. market increased 3% to $1,648 million. International sales jumped 8% (up 10% in constant currency) to $1,408 million, driven by emerging market growth.

Segment Analysis

Revenues from the larger Medical Devices segment jumped 8% (up 9% in constant currency) year over year to $2,133 million. The division is benefiting from acquisitions and new product offerings.

Within Medical Devices, revenues from Endomechanical Instruments quite unexpectedly climbed 7% to $620 million, led by solid gains from Tri-Staple reloads. Sales of Soft Tissue Repair products grew 3% to $225 million, on the back of higher suture, mesh and mechanical fixation sales. Further, Airway & Ventilation sub-segment sales rose 8% to $195 million, boosted by the acquisition of Newport Medical and double-digit growth in ventilator sales.

Revenues from Energy Devices climbed 8% to $346 million, again reflecting strong vessel sealing sales. Revenues from Oximetry and Monitoring sub-segment surged 16% to $241 million, owing to higher sales of monitors and sensors as well as the Oridion acquisition. Moreover, Vascular product sales grew 7% to $414 million, backed by solid growth across neurovascular and peripheral vascular offerings.

Revenues from Covidien’s Pharma segment remained flat year over year at $489 million. Robust gains in the Specialty Pharmaceuticals business were offset by lower Active Pharmaceutical and Contrast Product sales.
Specialty Pharmaceuticals sales soared 25% to $167 million spurred by solid revenue from the Exalgo product and the newly launched Concerta ER tablets. However, Active Pharmaceutical Ingredients sales decreased 9% mainly due to unsuitable customer order timing. Contrast Product sales too declined 17% due to the sluggish U.S. markets and tough year-over-year comparables. Revenues from Radiopharmaceuticals inched down 1%.

Sales from Medical Supplies segment increased 2% (up 3% in constant currency) to $434 million in the quarter due to increased SharpSafety sales. Additionally, the exit of Abbott Nutrition, a division of Abbott Laboratories (ABT), has created opportunities for the nursing care business to gain market share in the U.S. enteral feeding pumps market.

Gross margin was 57.5% in the fourth quarter compared to 58.7% in the year-ago comparable period. On an adjusted basis, gross margin was 57.5% versus 58.8% in the prior year-quarter. Unfavorable currency fluctuation offset improved productivity and favorable business mix.

Selling, general and administrative expenses were lower at 30.8% of sales in the reported quarter compared with 31.3% of sales in the year-ago quarter. R&D expense edged down to 4.9% of revenues from 5.0% in the prior-year period. Adjusted operating margin stood at 22.4% compared with 24.3% a year ago.


Covidien repurchased roughly 4.4 million ordinary shares under its share buyback program in the first quarter.


Covidien raised its fiscal 2013 guidance on the back of the successful first quarter results, an extended research and development R&D tax credit along with the recent approval from the Food and Drug Administration (:FDA) for its Concerta ER tablets.

For fiscal 2013, Covidien expects net revenues to grow by 5% to 8% (earlier 3% to 6%) year over year. The company’s core Medical Devices segment is expected to be up 5%–8% (earlier 4%–7%). The Pharmaceuticals division is anticipated to grow at a high single-digit rate or more (earlier 1% to 4%) and the Medical Supplies business is expected to grow 1%–3% (earlier flat) year over year. All of the above mentioned growth rates are based on current foreign exchange rates.

Additionally, adjusted operating margin forecast remains unchanged in the range of 22% to 23%. Effective tax rate is expected in the band of 17.5 and 18.5% (earlier 18% and 19%) for fiscal 2013.

The fiscal 2013 Zacks Consensus Estimates for revenues and earnings are $12,379 million and $6.70 per share, respectively.

About the Company

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.

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 into emerging markets. It is also enhancing shareholders’ value through dividends and share repurchases, leveraging healthy free cash flows and strong earnings power.

However, Covidien faces stiff competition and remains exposed to pricing and utilization headwinds, along with acquisition risks. We remain concerned about the tepid U.S. health services industry and the soft European economy. Also, foreign exchange translation is expected to dampen growth.

Covidien currently carries a short-term Zacks #3 Rank (Hold). Medical products companies, such as Nxstage Medical, Inc. (NXTM), which carries a Zacks Rank #1 (Strong Buy), is expected to do well. Hanger Inc. (HGR), with a Zacks Rank #2 (Buy), will be reporting its results on Feb 13.

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