Will Covidien Be Restructuring Soon To Reduce Expenses?

Posted in Medical Device Business by Arundhati Parmar on August 1, 2013

Covidien reported its fiscal third-quarter earnings Thursday, which mostly met analyst expectations.

The Dublin, Ireland, firm saw revenue climb 3% to $2.58 billion in the quarter ended June 28, from $2.51 billion in the same quarter a year ago. Profits fell to $356 million, or 85 cents per diluted share, down from $453 million, or 81 cents per diluted share in the comparable period in 2012. Still, earnings-per-share beat analyst estimates by two pennies. Having spun off its pharma business - Mallinckrodt on July 1, the company may soon look to reduce expenses, which likely means that job cuts are looming. 

Overall, in its fiscal third quarter, most Covidien businesses saw growing revenue, including the medical devices, endo mechanical, oximetry and energy. But there were weaknesses in the vascular and medical supplies business, according to a research note published by Glenn Novarro, senior medical device analyst at RBC Capital Markets.

But perhaps the most interesting bit of news on the conference call with analysts came when CFO Chuck Dockendorff answered Bank of America analyst Bob Hopkins question about expenses. Hopkins asked (his question is edited) :

Now that we're post the Mallinckrodt spin, obviously your overhead expenses are still roughly $400 million. They were $400 million when you were a $12 billion business, and now you are a $10 billion business.  So I was wondering if you could comment on the potential for incremental restructuring as you look forward to offset some of that relatively higher expense base?

And Dockendorff responded this way (his comments are edited):

... We are very well aware of what we call corporate costs of $400 million. We are looking at our overhead, both on corporate and G&A [general and administrative expenses] around the regions in our company. And we will be initiating programs to take that down. We will be looking at our manufacturing footprint and some of the optimization we can [have] there. We feel very comfortable about future opportunities to reduce these expenses. [But if] you lose 20% of your business, you can't go in and eliminates [expenses] dollar for dollar because there are just some fixed expenses. You can't eliminate 20% of our board, [for example]. But I think at the end we see opportunities for restructuring and expense reduction that far exceed the amount of business that we lost with the pharma spin and any lead behind costs that we have there.

Given this focus on reducing expenses, all eyes will be on Sept. 12, when Covidien executives will reveal more about restructuring to investors and analysts.

[Photo Credit: MarsBars]

-- By Arundhati Parmar, Senior Editor, MD+DI


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