Margin squeeze, legal expenses lead to lower Covidien earnings

Covidien, the Dublin-based surgical and medical-device supplier, reported that sales increased by 4% in the third quarter, but profits fell by 22%.

Covidien's gross margin during the third quarter declined 0.6 percentage points to 58.9%, while selling, general and administrative expenses went up because of a legal charge relating to pelvic mesh product liability lawsuits.

Sales rose 4% to $2.69 billion in the third quarter of 2014, compared with $ 2.58 billion in the same quarter a year ago, while net income was $306 million, compared with $396 in the third quarter of 2013.

The company, which was spun off from Tyco International in 2007, is in talks to be acquired by Medtronic, the Minneapolis-based medical-device maker. The tie-up would allow Medtronic to move its headquarters to Ireland, setting the company up to take advantage of the lower tax rate. It will also create one of the world's largest medical supplies companies, a move that may aid both companies during an era of cost-cutting in the U.S.

The surgical solutions business reported the strongest growth in the U.S. market, with sales rising 6% to $494 million in the third quarter. Domestic sales of respiratory and patient-care products went up 2% to $597 million, while revenue for vascular therapies fell 4% to $234 million.

Covidien CEO Jose Almeida said during a call with investors that product volume has been “business as usual in the U.S.” He also told investors that the price erosion affecting most if not all device manufacturers and medical suppliers was on the low end for Covidien during the third quarter.

The deal is expected to close this year. Medtronic reports its first-quarter earnings Aug. 19.

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