BorgWarner Beats, Ups Outlook – Analyst Blog
BorgWarner Inc. (BWA) showed a profit of 78 cents per share (before special items) in the second quarter of the year, ahead of the Zacks Consensus Estimate of 67 cents per share. This was a significant improvement from a loss of 5 cents per share (before special items) in the prior-year quarter, driven by strong demand for the company’s powertrain products and increased content in Europe.Revenues increased a robust 55% to $1.42 billion, up from the Zacks Consensus Estimate of $1.32 billion. Operating profit improved to $117.3 million or 8.3% of sales from an operating loss of $49.5 million. Excluding special items, operating profit was $137.3 million or 9.7% of sales during the quarter.
Revenues in the Engine segment soared 52% to $1.02 billion, driven by strong demand for turbocharger products in Asia and Europe. Excluding the impact of currency, revenues were up 55%.
Revenues in the Drivetrain segment shot up 64% to $408.7 million, driven by higher sales of its four-wheel drive system in Asia, and of dual clutch transmission modules and other automatic transmission components in Europe. Excluding the impact of currency, revenues increased by 66%.
BorgWarner had cash amounting to $187.5 million as of June 30, 2010 a decline from $357.4 million as of December 31, 2009. Long-term debt was $781 million as of the above date. Long-term debt to capitalization ratio stood at 28%, up by 2 percentage points from the period ended December 31, 2009.
In the first half of the year, cash flow from operating activities rose to $208.3 million from $173.8 million in the prior-year period due to an improvement in profit. Capital expenditures, including tooling outlays, increased to $107.4 million from $88.3 million a year ago.
BorgWarner raised its earnings outlook for 2010 based on growing demand for its products. The company anticipates sales to grow 32%–35% in 2010, up from the prior guidance of 28%–32%. Consequently, earnings are expected in the range of $2.60 to $2.80 per share, up from the previous outlook of $2.20–$2.50 per share.
Despite the improved results and raised outlook, we believe strong competition and pricing pressure from the OEMs (about 75% of the company’s sales are to OEMs) will undermine the company’s results in near term. As a result, we recommend the shares of the company as Zacks #3 Rank (Hold) in the short term (1–3 months).
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ITT Beats on Lower Revenue – Analyst Blog
ITT Corporation’s (ITT) second quarter 2010 earnings results, released before the opening bell today, beat the Zacks Consensus Estimate on the bottomline. The company reported earnings per share from continuing operation of $1.22, which increased 12% year over year and was above the Zacks Consensus Estimate of $1.07. Earnings in the quarter were driven by strong productivity and solid operating margins. Adjusted earnings per share from continuing operation was $1.14, up 9% year over year.Total Revenue
Total revenue of $2.7 billion was 3.5% below the Zacks Consensus Estimate of $2.8 billion for the quarter. The 1% year-over-year increase in the company’s revenue was driven by an increase in organic orders in commercial businesses in the emerging markets. The company also witnessed significant market recovery during the quarter.
Segment Performance
Defense & Information Solutions segment sales declined by 3% year over year to $1.5 billion, led by declined volume of tactical radios and counter improvised explosive device units. This was partially offset by growth in special purpose jammers, radar, composite structures, increased activity under the Automatic Dependent Surveillance-Broadcast (ADS-B), air-traffic control program and strong revenue from its international night vision goggle. Orders in the segment decreased by 49% organically, with a backlog of $4.1 billion.
Operating income for the segment declined by 2% year over year. The business transformation initiatives, however, improved the segment’s productivity and lowered its expenses.
Fluid Technology segment revenue increased by 1% year over year to $878 million, primarily driven by the acquisition of Nova Analytics. Organically, revenue decreased by 4% due to municipal weakness in Europe and comparative better oil and mining projects in the prior-year quarter. This decline was partially offset by improvement in the residential markets and good performance in the US treatment and global dewatering projects. The segment recorded order growth of 15% organically.
Operating income for the segment increased by 16% year over year due to good productivity and a decline in restructuring charges.
Motion & Flow Control segment revenue increased by 17% year over year to $361 million. Organic growth was 21% led by improvements in auto, connectors, marine, beverage and growth in the emerging markets. The segment recorded order growth of 17% organically.
Operating income for the segment increased by 27% year over year due to strong productivity and reduced restructuring charges.
Income
Consolidated operating income for the quarter was $324 million compared with $303 million in the year-ago quarter. ITT Corporation incurred total SG&A expense of approximately $375 million compared with approximately $389 million in the second quarter of 2009.
Balance Sheet
Cash and cash equivalents were $844 million with long-term debt of $1.4 billion and shareowner’s equity of $4.0 billion.
Acquisitions
During the quarter, the company expanded its Fluid technology segment with the addition of Canberra Pumps in Brazil. The company also signed a definitive agreement to acquire Godwin Pumps. The acquisitions strengthened the segment portfolio.
Outlook
For the third quarter of 2010, ITT Corporation expects adjusted earnings per share to decrease by 6% year over year to a range of 94 cents to 98 cents. The quarter’s earnings are expected to decline due to changes in customer order pattern and dilutive impact of the portfolio repositioning actions. Revenue for the quarter is expected to increase by 1% year over year to approximately $2.7 billion.
For full-year 2010, the company expects adjusted earnings per share, including 11 cents dilutive impact from acquisition and discontinued acquisition, to be in the range of $4.08 to $4.18. Revenue is expected to be about $11 billion, up 3% compared with 2009. Organically, revenue is expected to grow by 2%, down from the prior expectation of 3%.
Sales growth in Defense & Information Solutions in 2010 is expected to be flat, Fluid Technology is expected to be 6% and Motion & Flow Control is expected to be 14%.
Headquartered in New York City, ITT Corporation is a global multi-industry leader in high-technology engineering and manufacturing. It is engaged in the design, manufacture, and sale of a wide range of engineered products and services.
ITT Geospatial Systems, a part of ITT Corporation, offers innovative night vision, remote sensing and navigation solutions. These solutions provide sight and situational awareness at the space, airborne, ground and soldier levels. Major competitors of ITT are Lockheed Martin Corporation (LMT) and Raytheon Co. (RTN).
We currently maintain our Neutral rating on ITT Corporation, with a Zacks #3 Rank over the next one-to-three months.
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Stanley Acquires CRC-Evans – Analyst Blog
Stanley Black & Decker (SWK) announced the acquisition of CRC-Evans International for roughly $445 million in a cash transaction from a consortium of investors led by Natural Gas Partners, a private equity firm. CRC-Evans International, with approximately $250 million revenue in fiscal 2010, is a leading supplier of specialized tools, equipment and services for the construction of oil and natural gas transmission pipelines.
The acquisition will be funded from the company’s existing liquidity amounting to approximately $1,598.4 million at the end of the second quarter of 2010. There will be no increases in debt levels by the end of the year.
CRC-Evans acquisition establishes Stanley Black & Decker in a growing global oil and natural gas infrastructure industry, with the US pipeline construction expected to soar to 5,441 miles by 2011. Operating within the Industrial segment, the acquisition will be immediately accretive to earnings and add 10 cents to EPS over three years of acquisition. The company also expects to realize $5 million in cost synergies over three years, with roughly $1 million in the first full year.
Stanley Black & Decker’s emphasis is on growing within its core and five strategic growth platforms including Convergent Security, Mechanical Security, Engineered Fastening, Infrastructure and Healthcare. The company intends to grow its infrastructure platform to roughly $1 billion to $2 billion in over 5 to 7 years with prime areas of focus being specialized tools, equipment and services for commissioning, repair and maintenance of infrastructure in areas such as oil and gas, transportation, water and sewer, and power systems.
Stanley Black & Decker manufactures tools and engineered security solutions across the globe. Prime competitors of the company are Danaher Corp. (DHR), Makita Corp. (MKTAY), and Snap-on Inc. (SNA). We currently maintain our Neutral recommendation on the stock, supported by Zacks #3 (Hold) Rank.
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McAfee Meets Zacks Consensus – Analyst Blog
McAfee Inc. (MFE) reported second-quarter 2010 earnings per share of 46 cents, in line with the Zacks Consensus Estimate, while revenue of $489.2 million was below the Zacks consensus estimate of $507.0 million.
Revenue
McAfee Inc. reported second quarter 2010 GAAP revenue of $489.2 million, up 4.0% from $468.7 million in the year-ago quarter. This advance was due to the revenue increases across both the consumer and corporate segments. On the other hand, the company generated approximately $14.0 million of lower in-period revenue as new sales orders were generated at lower revenue realization rates. The revenue realization rate fell short of the company's expectations, with the lowest amount generated in the past four quarters.
McAfee reported increases in revenue across all segments. The Corporate Business segment reported second quarter revenue of $298.0 million (60.9% of revenue), up 3.0% year over year. In this segment, the company closed 474 deals, with values greater than $100,000 each, including 78 deals of over $500,000 in value and 30 deals of over $1.0 million in value.
The Consumer Business segment reported revenue of $191.0 million (39.0% of revenue), up 9.0% year over year. In this segment the company signed 25 agreements and also launched 67 new online partnerships, bringing the total to over 200 brand name partners globally.
The North America segment reported revenue of $286.0 million, up 8.0% year over year. The International segment reported revenue of $203.0 million, flat on a year-over-year basis. Currency fluctuation negatively impacted revenue by $5.0 million on a year-over-year basis, and by $12.0 million on a sequential basis.
Operating Results
Second-quarter GAAP gross profit was $358.4 million, up 1.4% on a year-over-year basis. Excluding special items, such as the impact of signature file update and amortization of expense, non-GAAP gross profit for the quarter was $385.6 million, up 6.5% on a year-over-year basis. This resulted in a gross margin of 74.7% in the current quarter, compared to 75.4% in the year-ago quarter.
Operating income on a GAAP basis was $55.1 million, down 1.4% on a year-over-year basis. Excluding special items, non-GAAP operating income for the quarter was $102.8 million, up 9.1% on a year-over-year basis. This resulted in an operating margin of 11.3% in the current quarter, compared to 11.9% in the year-ago quarter.
GAAP net income for the quarter was $39.4 million or $0.25 per share, down from $28.6 million or $0.18 per share reported in the year-ago quarter. Excluding special items like impact of signature file update, restructuring, amortization, acquisition related charges and others, non-GAAP net income was $71.6 million or $0.46 per share, up from $63.6 million or $0.40 per share in the year-ago quarter.
Balance Sheet & Cash Flow
During the recently-concluded quarter, the company generated around $134.0 million in cash flow from operations. Days sales outstanding (DSOs) were 45 days. At the end of the second quarter, the company reported cash and marketable securities of $804.0 million, down from $902.0 million in the previous quarter. Deferred revenue was $1.4 billion. During the second quarter, the company repurchased approximately 4.6 million shares of its common stock for $150.0 million, with another $200.0 million remaining that are authorized for repurchase.
Guidance
Management expects third quarter 2010 revenue in the range of $505.0 to $520.0 million. Third quarter 2010 GAAP net income is expected to be in the range of $0.29 to $0.33 per diluted share and non-GAAP net income in the range of $0.62 to $0.66 per diluted share. The tax rate for the year is expected to be 29.0% on a GAAP basis and 24.0% on a non-GAAP basis.
Conclusion
The company delivered respectable second-quarter results, although the EPS was in line our expectations. In addition, the company came up with decent third-quarter guidance. The strong product portfolio, growth prospects in all its served markets, acquisitions, customer win momentum and good cash generation ability are positives.
On the other hand, we are a bit concerned about the intense competition that the company faces from smaller players, as well as hardware and software manufacturers entering the IT security business. Plus, the enhanced level of security offered by Microsoft Corp.'s (MSFT) Windows OS also poses some challenges to McAfee.
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Gen-Probe Leaps Ahead of Forecast – Analyst Blog
Diagnostic product maker Gen-Probe Inc. (GPRO) announced second-quarter fiscal 2010 adjusted earnings of 52 cents per share, exceeding the Zacks Consensus Estimate of 49 cents and the year-ago earnings of 45 cents. Net income soared 42% year-over-year to $28.1 million (or 57 cents a share), riding on solid top-line growth.
Revenues
Revenues surged 15% year over year to $138.6 million, beating the Zacks Consensus Estimate of $137 million, buoyed by double-digit sales growth from the clinical diagnostics and blood screening product businesses. Clinical diagnostic revenues grew 10%, fueled by higher adoption of APTIMA Combo 2 assay and Prodesse products.
Blood screening product sales cruised 22% year over year to $55.7 million. Growth was supported by higher shipment of Procleix Ultrio and West Nile virus assays, as well as favorable currency exchange translation and increased sales of TIGRIS systems to strategic partner Novartis (NVS).
Revenues from research products and services, however, dipped 11% year over year to $3.2 million, primarily due to the divestiture of the BioKits food testing business in 2009 and unfavorable foreign exchange swings.
Margins & Expenses
Adjusted (excluding acquisition-related depreciation charges) gross margin for the quarter fell to 66.7% from 67.3% a year ago as low-margin products mostly constituted the sales mix. Research and development expenses increased 4% year over year to $27.1 million, mainly stemming from the company's investment on developing the PANTHER instrument and PCA3 and trichomonas assays. Marketing and sales expenses rose 13% to $15.8 million as a result of sales force expansion in Europe and market development initiatives.
Balance Sheet, Cash Flow & Share Repurchases
Gen-probe exited the quarter with a healthy balance sheet. The company had cash and cash equivalents and marketable securities of $474.8 million (up 2.3% year over year) and short-term debt of $240.8 million (flat year over year).
Gen-Probe generated $41.1 million in cash flows from operations during the quarter and invested $6.7 million in capital expenditure, resulting in free cash flow of $34.4 million. The company repurchased 910,500 shares in the quarter for $41.3 million.
Outlook
The company provided its updated guidance for fiscal 2010 with EPS, on a reported basis, now projected in the range of $2.07-$2.20, up from $1.99-$2.12. However, it continues to expect adjusted EPS between $2.12 and $2.25 and revenues between $545 million and $565 million. Adjusted operating margin target remains at 27-28%.
California-based Gen-Probe has been a pioneer in the commercial and scientific development of nucleic acid testing (NAT) for the diagnosis of infectious diseases. The company sells its products in the clinical diagnostic as well as blood screening markets. Gen-Probe is a market leader in domestic gonorrhea and chlamydia testing with its PACE and APTIMA assay product lines.
Gen-Probe faces stiff competition from larger, more established firms in the molecular diagnostic industry such as Roche (RHHBY), Becton, Dickinson & Company (BDX and Abbott Labs (ABT).
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Quality Systems Posts Mixed Bag – Analyst Blog
Quality Systems (QSII) reported first-quarter fiscal 2011 adjusted (excluding one-time items) earnings per share of 42 cents, lower than the Zacks Consensus Estimate of 47 cents but higher that the year-ago figure of 36 cents.Revenues
Revenue registered a record $82.9 million, up 24% year-over-year, ahead of the Zacks Consensus Estimate of $81 million.
Segment-wise Results
System sales came in at $29.1 million, growing 37.3% year over year. Revenues from the two subcomponents were $24.8 million (up 39.3% year over year) from Software, Hardware and Supplies and of $4.3 million (up 22.9%) from Implementation and Training Services.
Maintenance, EDI, Revenue Cycle Management and other Services revenues were $53.9 million, an 18.7% year over year increase. Segment revenue was reported under four headings. Maintenance charges amounted to $25.5 million, up 18.1%. Electronic data interchange services sales stood at $9.8 million, an increase of 19.5%. Revenue Cycle Management grossed $10.8 million, leaping 19.8% and the “Other” sub-segment generated $7.8 million, up 18.2%.
Margin
Gross margin was 61.6% in the first quarter, slightly above 61.1% achieved in the prior-year quarter.
Balance Sheet
Cash and cash equivalents were $93.2 million at the end of the first quarter, up 10.2% on a year-over-year basis.
Outlook
Quality Systems is optimistic that it will benefit from the incentives to be derived by medical practitioners under the American Recovery and Reinvestment Act (ARRA). It notes that the clarification provided by the U.S. Department of Health and Human Services regarding “meaningful use” criteria will encourage medical practitioners and hospitals to engage in constructive decision-making regarding implementation of electronic health records. In this regard, the company’s NextGen Healthcare know how is expected to be beneficial to healthcare providers.
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Portfolio Recovery Tops – Analyst Blog
On July 29, 2010, Portfolio Recovery Associates Inc. (PRAA) reported its second-quarter income from continuing operations of $19.5 million or $1.14 per share, surpassing the Zacks Consensus Estimate of 92 cents. The strong earnings were primarily driven by higher-than-expected top-line growth attributable to continuous improvisation of core call center and legal collections. Moreover, investments in bankruptcy portfolios continued to mature, which in turn helped surmount the weak economy and the allowance charge of $6.3 million.
Results in the reported quarter increased favorably by 67% from the year-ago earnings of $11.7 million or 76 cents per share.
The amortization rate in the quarter included a $6.3 million net allowance charge (approximately $3.9 million after tax or 23 cents per share), against pools of finance receivables accounts. Portfolio Recovery also witnessed continuing non-cash equity-based compensation expense of $1.2 million (approximately $0.7 million after tax, or 4 cents per share).
Business Update
Portfolio Recovery’s total revenue increased 31% to $93.0 million from $71.1 million in the year-ago period. This was driven by the growth of 34.4% of cash receipts in the reported quarter from $107.5 million in the prior-year quarter. Portfolio Recovery utilized 40.1% of its cash collections to reduce the carrying basis of its owned debt portfolios against 40.3% in the year ago quarter.
Cash collections jumped 42% year-over-year to $128 million from $90.5 million in the year-ago period. Call center and other collections posted a 9% increase, external legal collections gained 14%, internal legal collections grew 167% and purchased bankruptcy collections rose 123%, compared to the prior year quarter.
Balance Sheet
During the reported quarter, Portfolio Recovery spent $86.8 million in portfolio acquisitions to purchase $1.7 billion of face-value debt. This debt was acquired in 78 portfolios from 11 different sellers to further improve collector productivity and to initiate steps to strengthen the fee businesses.
Portfolio Recovery exited the quarter with net repayments of $6.8 million on its line of credit, leaving outstanding borrowings at $289.5 million. As of June 30, 2010, Portfolio Recovery had $75.5 million remaining under its line of available borrowing.
At the end of June 30, 2010, Portfolio Recovery’s cash balances came in at $18.3 million as against $20.3 million at the end of the prior year quarter.
As of June 30, 2010, Portfolio recovery had total assets of $915.0 million and shareholders’ equity of $448.7 million.
Our Take
Overall, Portfolio Recovery results have been showing great improvement with higher revenues offsetting the seasonal weakness in consumer collections. The company also benefits from long-term investments made over the past several years. We expect these investments to continue as they would allow the company to overcome downward pressure of the economy resulting in high unemployment and limited availability of consumer credit.
Portfolio Recovery is also expected to benefit from Claims Compensation Bureau, LLC (CCB), whose 62% stake was acquired in March 2010. CCB has expanded even beyond securities class action settlements and payment processing of anti-trust class action settlements. This is expected to be accretive to the earnings of Portfolio Recovery in the medium to long term. On the other hand, CCB is also expected to gain from Portfolio Recovery’s already well-positioned business portfolio.
Additionally, the short-term Zacks #2 Rank (Buy) rating for Portfolio Recovery indicates a likelihood of upward bias on the shares over the near term.
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REGN’s Loss Narrower than Expected – Analyst Blog
Regeneron Pharmaceuticals Inc.’s (REGN) second-quarter 2010 net loss of $25.5 million, or 31 cents per share, was narrower than the Zacks Consensus Estimate of a net loss of 38 cents. The company suffered a loss of $14.9 million, or 19 cents per share in the year-ago quarter. The wider year-over-year loss in the reported quarter despite higher revenues was attributable to higher research and development expenses.Total revenue in the reported quarter climbed 28.7% year-over-year to $115.9 million. Total revenue included collaboration revenue, technology licensing revenue, net product sales and contract research and other revenue. The increase in total revenue was mainly attributable to higher collaboration revenues in the quarter.
Collaboration revenues climbed approximately 34% year over year to $98.6 million in the second quarter of 2010. Out of that, $84.9 million came from Regeneron’s aflibercept and antibody collaborations with Sanofi-Aventis (SNY) and $13.7 million from its VEGF Trap-Eye collaboration with Bayer HealthCare.
Revenues from technology licensing, arising out of the license agreements with AstraZeneca (AZN) and Astellas, remained flat at approximately $10 million. Net product sales from the company’s only marketed product, Arcalyst, approved for treating cryopyrin-associated periodic syndromes, came in at $5.2 million in the second quarter of 2010, up 15.6% year-over-year. Revenues from contract research and others accounted for the balance in the reported quarter.
Total operating expenses in the quarter climbed 31% year-over-year to $139.6 million. Research and development (R&D) expenditure for the quarter jumped 32% year-over-year to $124.5 million, primarily because of the additional R&D headcount, clinical and pre-clinical development costs for the company’s pipeline candidates.
Selling, general and administrative (SG&A) expenses increased to $14 million in the reported quarter from $11.0 million in the year-ago quarter. The rise was attributable to higher compensation expense, higher recruitment costs and facility-related costs.
Regeneron Extends Deal
Regeneron Pharmaceuticals and Japanese company Astellas Pharma Inc. have extended the agreement that permits Astellas to make use of Regeneron's antibody development technology to discover new drug candidates. The deal was originally signed in 2007. However, the current amendment supersedes the original agreement.
Under the new deal, the Japanese company has to make an upfront payment of $165 million to Regeneron and a further $130 million in June 2018 unless the deal is terminated before that date.
Our Recommendation
Regeneron is a Zacks #3 Rank (Hold) stock. This implies that the company is expected to perform in line with the broader US equity market over the next 1-3 months. We are also Neutral on Regeneron in the long-term. Our long-term Neutral stance on the company indicates that the stock is expected to replicate its short-term performance, but over the next 6+ months. Consequently, we advise investors to retain the stock over the time-period.
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Pride Meets Zacks Consensus – Analyst Blog
Pride International Inc. (PDE) reported second-quarter 2010 earnings of 32 cents per share, in line with the Zacks Consensus Estimate, but well behind the year-ago earnings of 76 cents.
The company earned revenues of $350.3 million during the second quarter of 2010, down from $439.5 million in the second quarter of 2009 and edged past the Zacks Consensus Estimate of $348 million.
Segmental Performance
Revenues from Pride’s Deepwater fleet was $222.5 million, almost flat with $220.8 million in the last quarter. Deepwater operating earnings dropped over 5% from the previous quarter to $83.0 million.
Average dayrate for the Deepwater fleet was $340,800 in the quarter, compared with $335,100 in the last quarter. Of the Deepwater fleet, 90% was utilized, compared with 91% in the last quarter and 95% in the year-earlier quarter. As of June 30, 2010, the company had 100% of the available rig days in its Deepwater segment under contract for the balance of 2010, 80% for 2011, 67% for 2012 and 55% for 2013.
Pride’s Midwater fleet reported quarterly revenue of $89.3 million, down about 5% sequentially. The decrease was mainly due to lower utilization levels. Operating earnings were $12.7 million, down sharply from $30.9 million on a sequential basis.
Average dayrate in this segment was $269,700, slightly up from $265,000 in the preceding quarter. Utilization in the quarter decreased to 61% from 66% in the last quarter. Currently, the company has 78% of the available rig days contracted for 2010, 76% for 2011, 35% for 2012 and 14% for 2013.
Revenues from Pride’s 7 Independent Leg Jackup rigs, operating in India, the Middle East, West Africa, and Mexico, came in at $21.6 million during the quarter, down nearly 32% sequentially. Operating loss was $12.1 million, substantially wider than $1.2 million loss in the previous quarter.
On a sequential basis, average dayrate in this segment decreased from $110,100 to $87,100 and utilization dropped from 45% to 39%. The decline in utilization reflects lower activity on the Pride Hawaii, together with planned out-of-service time on the Pride Montana, partially offset by higher activity on the Pride Cabinda following out-of-service time in the first quarter.
Liquidity
Net cash flow from operating activities was $110.2 million during the reported quarter while capital expenditures totaled $115.8 million. The company expects to incur total capital expenditure of approximately $1.05 billion in 2010. Cash balance at the end of the quarter stood at $311 million. At the end of the quarter, debt balance was $1.18 billion, representing a debt-to-capitalization ratio of 21.1%.
Outlook
Deepwater is a compelling growth industry and Pride is a proven leader in this space with its engineering and product management skills. However, the Mocondo incident hit hard the offshore drillers of the Gulf of Mexico (GoM) region, eventually leading to an uncertain near-term outlook.
With lower demand, clients are taking a wait-and-see approach in hopes of lower day-rates. Rig relocations out of the GoM are having a negative impact on global day-rates, especially moored rigs. Additional floater rigs are expected to leave the region as the moratorium issue remains unresolved. Hence, we have a short-term Zacks#4 Rank (Sell) for Pride.
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Covidien Beats by a Nickel – Analyst Blog
Ireland-based healthcare product maker Covidien plc (COV) reported third-quarter fiscal 2010 results with adjusted (excluding one-time items such as restructuring charges and tax-related adjustments) earnings per share of 85 cents beating the Zacks Consensus Estimate of 80 cents and exceeding the year-ago quarter earnings of 74 cents.Net income from continued operation sailed 29% year-over-year to $352 million (or 70 cents a share), favored by higher medical devices sales and lower research and development expenses.
Revenues
Net sales edged up 2% year-over-year to $2.56 billion, but missed the Zacks Consensus Estimate of $2.62 billion as incremental revenues from medical devices were marred by the decline in the pharmaceuticals division.
Segment Analysis
Medical Devices revenues grew 6% year-over-year to $1.54 billion on the back of double-digit revenue expansions across Oximetry and Monitoring (up 22% year-over-year), Energy Devices (up 14%) and Vascular (up 22%) product-lines.
Energy revenues were boosted by healthy vessel sealing sales while the acquisition of brain monitoring equipment manufacturer Aspect Medical catalyzed Oximetry and Monitoring sales growth. This was, by some measure, offset by a 6% decline in Airway and Ventilation products sales, impacted by the divestiture of the diagnostics product unit.
Healthy results from medical devices were, however, eclipsed by a sluggish pharmaceuticals business as sales clipped 6% year-over-year to $507 million. The division remains challenged by aggressive competition and pricing pressure which has contributed to erosion in Generic products sales.
Moreover, revenues from Specialty Pharmaceuticals and Active Pharmaceutical Ingredients dipped year-over-year in the quarter. Covidien expects weakness in its pharmaceuticals segment to sustain through fiscal 2010.
Revenues from Medical Supplies segment also fell 3% year-over-year to $427 million, attributable to lower sales of SharpSafety (offers needles, syringes and disposable products) and Nursing Care products.
Margins
Gross margin of 55.6% represents an increase from 54.4% a year-ago, benefiting from by better sales mix in the Medical Devices segment, synergies from restructuring initiatives and favorable foreign exchange translation. Adjusted operating margin improved to 22.2% from 21.3% a year ago.
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).
Outlook
Covidien has not provided any updated guidance for fiscal 2010. It expects revenues and operating margins to grow 5%-8% and 21%-22%, respectively, in the current fiscal year.
Covidien boasts a well diversified product and technology portfolio. The company remains committed to rolling out new products and technologies, focusing on faster-growing products and markets, and boosting market share in core segments through investments in sales and marketing infrastructure.
The recent $2.6 billion acquisition of Endovascular devices maker ev3 Inc has pushed Covidien’s leadership ahead in the endovascular devices market giving it a strong foothold in both the peripheral vascular and neurovascular sub-segments.
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