Covidien (COV) Spin-Off, Mallinckrodt, on Track for June 2013
COV Spin-Off MNK on Track for a June 2013 Completion
On April 26, 2013, Covidien PLC (NYSE: COV, $61.96, Market Capitalization: $29.2 billion) reported a mixed set of 2Q13 results. Although, sales increased 5% YOY (7% excluding foreign exchange effect), it marginally fell short of street estimates. Adjusted earnings per share for the quarter came in at $1.12 higher than $1.09 estimated by the street. Sales growth was led by the Medical Devices and Pharmaceutical segments. Operational sales growth in medical devices was driven by new products and higher volume, while pharmaceutical sales were driven by Specialty Pharmaceuticals following the launch of Methylphenidate HCl ER tablets.
Management indicated that COV remains on track to complete the proposed spin-off of Mallinckrodt, its pharmaceuticals business, by end June 2013. COV will also issue FY13 guidance for New Covidien as well as Mallinckrodt on that date. In 2Q13, COV repurchased approximately 3.2 million ordinary shares amounting to ~$200 million under its previously announced share buyback program. The management has further stated that the company is not interested in holding onto cash and expects it to return minimum 50% cash to the shareholders going forward.
Key Highlights of the Conference Call
Spin-Off Update: Management indicated that the proposed spin-off of Mallinckrodt, its pharmaceuticals business, remains on track to complete by end June 2013.
Adjusted Financials: Adjustments will be made with regards to the planned spin-off of the Pharmaceuticals segment. The company also announced FY13 guidance for New Covidien and Mallinckrodt.
Sluggish 3Q12: Although the company will release its guidance later, its management indicated at a sluggish performance in 3Q13. It also stated that the company will make signifi cant R&D investments and sees R&D line pressure in 2H13.
Share Buyback: In 2Q13, COV repurchased approximately 3.2 million ordinary shares amounting to ~$200 million under its previously announced share buyback program. The company has returned 94% of its free cash fl ow in the last 12 months. The management has further stated that the company is not interested in holding onto cash and expects to return minimum 50% cash to shareholders going forward.
COV revenues increased 5% YOY (7% excluding foreign exchange effect) to $3,103 million, led by a 6% YOY and 13% YOY operational revenue growth in the medical devices segment and pharmaceutical segment respectively. Operational sales growth in medical devices was driven by new products and higher volume, while pharmaceutical sales were driven by Specialty Pharmaceuticals following the launch of Methylphenidate HCl ER tablets.
Although gross profit increased 5% YOY to $1,787 million in 2Q13, gross margin declined 32 bps YOY as cost of goods sold increased largely due to the negative impact of the reactor shutdown and unfavorable raw material costs in the pharmaceuticals segment, partially offset by favorable mix and productivity improvements.
Operating income in 2Q13 declined 2% YOY to $596 million following higher SG&A expenses and restructuring charges. This was due to expenses associated with recent acquisitions, increased separation costs, the medical device tax and spending on growth initiatives, primarily to expand the company’s sales and marketing presence in emerging markets.
Net income for the quarter declined 12% YOY to $439 million primarily due to higher effective tax rates. Effective tax rate during 2Q13 came in at 21.9% compared to 13.6% in 2Q12. Diluted EPS for the quarter declined 10% YOY to $0.92.
(A) Medical Devices
Sales of Medical Devices increased 4% YOY to $2,091 million in 2Q13 on a reported basis, negatively impacted by adverse foreign exchange rate movements. Operational sales growth was 6% YOY driven by new products and higher volume. On an operational basis, Endomechanical sales increased 6% YOY on the back of stapling products, boosted by Tri-Staple™ reloads. Sales of Soft Tissue Repair products increased by a modest 2% YOY on an operational basis following higher sales of synthetic mesh products and sutures. Energy Devices sales increased by a robust 8% YOY on an operational basis primarily due to the continued excellent performance of vessel sealing products, which registered a double-digit quarterly sales gain. Oximetry & Monitoring products sale increased by a sharp 15% on an operational basis following strong double-digit growth of monitors and sensors. Airway & Ventilation sales were 6% above those of last year on an operational basis as sales of ventilators rose signifi cantly, aided by the Newport acquisition. Vascular products posted higher quarterly sales YOY following strong gains for neurovascular and increased sales for peripheral vascular and chronic venous insuffi ciency products. This was partially offset by decreased sales of compression products.
Pharmaceuticals sales increased 13% YOY to $573 million in 2Q13 on a reported basis as well
as operational basis. Sales of Specialty Pharmaceuticals climbed by a sharp 53% YOY growth
on a reported and operational basis primarily due to robust growth of generic products following the 1Q13 launch of Methylphenidate HCl ER tablets. This was complimented by the good performance of EXALGO® (hydromorphone HCl) ER tablets. Sales of Active Pharmaceutical Ingredients increased 12% YOY on an operational basis primarily due to substantial increase in narcotic products. Sales of Contrast Products declined by a signifi cant 11% YOY on an operational basis following lower sales of Optiray™ in the US.
(C) Medical Supplies
Medical Supplies posted revenues of $439 million in 2Q13, an increase of 1% YOY on a reported and operational basis following higher sales of Nursing Care products. This was partially offset by lower sales of SharpSafety™ and OEM products.
Covidien PLC (COV)
Parent: Covidien PLC (COV)
Sector: Diversified Healthcare
Covidien is a global healthcare products company. Post spin-off, New Covidien will comprise
of medical devices and medical supplies businesses. The medical devices segment in engaged
in development, manufacturing and distribution of energy devices, vascular products and other
medical products. The medical supplies segment develops, manufactures and distributes nursing care products, SharpSafety products and OEM products within the US and Europe.
Mallinckrodt PLC ("MNK")
Spin-Off: Mallinckrodt PLC
The Pharmaceuticals segment develops, manufactures and distributes specialty pharmaceuticals, active pharmaceutical ingredients, contrast products and radiopharmaceuticals.
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