NEW YORK (Bloomberg) Covidien Ltd., the medical-supplies maker spun off from Tyco International Ltd., reported a fiscal third-quarter net loss on costs associated with the settlement of a shareholder lawsuit against its former parent.

The loss for the period ended June 30 was $1.1 billion, or $2.23 a share, compared with net income of $361 million, or 73 cents, a year earlier. Sales rose 4.7 percent to $2.58 billion.

Covidien was part of the diversified manufacturing and services company built by former chief executive officer Dennis Kozlowski, now in New York State prison for stealing from Tyco. Covidien said in a June 8 company filing it was responsible for 42 percent of the costs for the lawsuit, brought by investors accusing Tyco of inflating its revenue. The charge for the fourth-largest securities fraud settlement in US history was disclosed to shareholders before the companies separated.

"These charges reflect our legacy as an operating unit of Tyco, and may mean complexity in the following quarters," chief executive officer Richard Meelia said in a conference call.

Eric Kraus, a Covidien spokesman, directed questions on the settlement to Tyco spokesman Paul Fitzhenry, who wasn't immediately available to comment.

Shares of Covidien rose 1 cent, to $41.15 at 10.12 a.m. in New York Stock Exchange composite trading. The shares fallen 11 percent from the spin-off in June through yesterday.

Covidien reiterated its forecast of 4 to 6 percent sales growth in 2007, followed by 2008 growth of 3 to 5 percent.

Excluding a $1.2 billion charge from settling the lawsuit, the company said it had net income of 67 cents a share.

"As an independent entity, we believe Covidien has the potential to unlock significant shareholder value," wrote analyst Glenn Reicin in a July 9 note. He rates the shares "overweight" and doesn't own any.

Formerly Tyco Healthcare, Covidien is based in Pembroke, Bermuda. The company has greater flexibility to focus on growth under chief executive officer Richard Meelia, Reicin wrote. The company is also recovering from underinvestment in research and development, Reicin said.

As Tyco Healthcare, the company spent $262 million for research and development in fiscal 2006, up from $134.3 million in 2002. Johnson & Johnson, Covidien's only bigger competitor in disposable-medical products, spent $7.1 billion on research in fiscal 2006 and almost $4 billion in 2002. Covidien's shares began trading on the New York Stock Exchange last month.

Revenue from the medical-device division rose 8.6 percent to $1.6 billion from $1.5 billion a year earlier. Imaging solutions rose 4.8 percent to $238 million. Pharmaceutical products rose 8.5 percent to $333 million.

Sales of medical supplies dropped 3.1 percent to $247 million on lower revenue from needles and syringes, said Charles J. Dockendorff, the chief financial officer, in a conference call.

Retail products, such as feminine hygiene and infant-care merchandise, dropped 18 percent to $178 million.

"We continue to think this business is a likely candidate for a divestiture," Reicin wrote.