International medical technology giant Covidien plc (COV) posted third-quarter fiscal 2011 (ended June 24) adjusted earnings per share (from continuing operation) of $1.01, outstripping the Zacks Consensus Estimate of 95 cents and surpassing the year-ago earnings of 85 cents. Adjusted earnings exclude one-time items such as restructuring charges and tax-related adjustments.
Net income (from continuing operation) ballooned 51% year over year to $532 million (or $1.06 a share), powered by a sharp decrease in tax and solid growth at the Ireland-based company’s Medical Devices business.
Net sales jumped 14% year over year to $2,926 million, also topping the Zacks Consensus Estimate of $2,862 million. Healthy double-digit growth in the Medical Devices segment more than neutralized the sustained weakness at the Pharmaceuticals division and a still choppy procedure volume environment given patient deferrals due to high unemployment. Foreign exchange swings contributed roughly 5% to the growth.
Revenues in the U.S. and international markets surged 12% and 17%, respectively, to $1,580 million and $1,346 million, respectively. While the results in Europe were healthy, the company faces some pricing pressure there stemming from the austerity measures. The forecast-topping results pushed up Covidien’s shares roughly 5.7% in regular trading on July 26.
Segment Review
Medical Devices sales cruised 22% year over year to $1.99 billion led by Vascular and Energy Devices product-lines with acquisitions, new products and higher volume contributing to the growth.
Within medical devices, Endomechanical Instruments revenues climbed 11% to $593 million, boosted by healthy growth in stapling products (including Tri-Staple). Energy Devices revenues soared 19% to $301 million on the heels of solid growth in vessel sealing sales. Soft Tissue Repair products sales jumped 10% to $229 million. Growth in suture business was partly offset by lower mesh and biosurgery sales.
Oximetry and Monitoring revenues surged 12% to $211 million, driven by strong sales of sensors and monitors, backed by Aspect Medical and Somanetics acquisitions. Airway and Ventilation products sales edged up 3% to $183 million with divestiture of the sleep therapy product line and lower ventilator sales impacting growth. Revenues from the Vascular business more than doubled to $368 million, buoyed by eV3 acquisition.
Covidien’s struggling Pharmaceuticals division had yet another weak quarter, with revenues edging down 1% to $500 million, hit by the divestiture of the U.S. nuclear pharmacy business and lower sales of specialty drugs (down 6% to $120 million).
Within Specialty Pharmaceuticals, generic product sales increased at a double-digit clip riding on the launch of the fentanyl patch and stabilization in generic pricing.
Active Pharmaceutical Ingredients revenues rose 4% to $107 million, helped by higher acetaminophen sales. Contrast Products sales grew 5% to $157 million, supported by favorable foreign exchange translation.
Revenues from Covidien’s Medical Supplies segment inched up 3% to $441 million on the back of higher medical surgical and nursing care product sales.
Margin & Expenses
Gross margin increased to 57.1% from 55.6% a year-ago, attributable to favorable mix, synergies from restructuring programs and favorable foreign exchange movements, partly mitigated by higher raw material prices.
Adjusted operating margin fell narrowly to 22.1% from 22.2% a year ago. Research and development expenses as a percentage of sales rose to 4.7% from 4.3% a year ago. Selling, general and administrative expenses (as a percentage of sales) increased to 30.3% from 29.4%, partly due to new product launches.
The company saw a marked decrease in the effective tax rate, which was 4.7% compared with 31.3% a year-ago, resulting from a favorable settlement with overseas tax authorities. On an adjusted basis, tax rate was 16.8% versus 20.5% a year-ago.
Cash Flows & Shareholder Returns
Covidien generated free cash flows of around $575 million in the third quarter. The company bought back roughly 4.9 million shares in the quarter under its existing repurchase program for $276 million. Covidien has returned more than $1 billion to its shareholders over the past twelve months, representing over 50% of its free cash flows, well above its target of 25%-40%.
Restructuring Program
During its third quarter commentary Covidien announced a restructuring program across its three business segments, aimed at boosting its cost structure. The move is expected cost the company roughly $275 million (pre-tax), most of which is likely to be incurred by end of fiscal 2014. Covidien expects $175-$225 million in annual savings from the effort.
Outlook
Covidien has not updated its fiscal 2011 guidance, issued in the last quarter. The company expects net sales for the year to grow 8% to 11% year over year. Adjusted operating margin target for the year is 21.5%-22.5% while free cash flows are expected to be at least $1.7 billion. The company’s year-to-date adjusted effective tax rate of 18.3% is consistent with its fiscal 2011 guidance of 18.5%-19.5%.
Covidien is a leading global healthcare products company that develops and markets medical solutions for better patient outcomes. The company’s core medical devices business faces stiff competition from Johnson & Johnson (JNJ), Becton Dickinson (BDX) and C.R. Bard (BCR).
Covidien remains committed to rolling out new products and technologies, focusing on growth markets, and boosting market share in core segments through investments in sales and marketing infrastructure.
Moreover, the company is expanding its portfolio through acquisitions and strategic collaborations. Covidien also remain focused in achieving its long-term target of mid single-digit revenues and double-digit earnings growth.
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