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International medical technology giant Covidien plc’s (COV - Analyst Report) first-quarter fiscal 2012 adjusted earnings per share (from continuing operation) of $1.13 outpaced the Zacks Consensus Estimate of $1.03 and exceeded the year-ago earnings of 95 cents. Adjusted earnings exclude one-time items such as restructuring and legal charges as well as costs related to the spin off of the company’s Pharmaceuticals division.

Net income (from continuing operation) for the quarter surged roughly 14% year over year to $494 million (or $1.02 a share) on the back of higher sales from the Ireland-based company’s core Medical Devices business.

Revenues

Net sales for the quarter rose 5% year over year to $2,898 million, modestly below the Zacks Consensus Estimate of $2,909 million. Foreign exchange movements had no impact on the growth. Geographically, revenues in the U.S. and international markets rose 4% and 5%, respectively, to $1,593 million and $1,305 million, respectively.

Segment Analysis

Revenues from the larger Medical Devices unit climbed 6% year over year to $1.98 billion, paced by double-digit growth across Vascular and Energy Devices product-lines with new products and higher volume contributing to the growth.

Within medical devices, Endomechanical Instruments revenues inched up 2% to $581 million, helped by stapling products (including Tri-Staple). Revenues from Energy Devices soared 19% to $321 million, boosted by strong vessel sealing sales. Soft Tissue Repair products sales edged down 1% to $218 million as growth in the suture business was more than masked by lower mesh and fixation and sales.

Oximetry and Monitoring sales crept up 1% to $207 million, driven by higher sales of monitors. Airway and Ventilation products sales dipped 3% to $181 million as increase in airway product revenues were neutralized by lower ventilator sales.

Vascular business had another strong quarter with revenues spiking 17% to $387 million, spurred by double-digit growth of venous insufficiency and neurovascular products.

Revenues from Covidien’s Pharmaceuticals division rose 4% to $490 million. The growth was primarily fueled by strong gains in the Active Pharmaceutical Ingredients business.

Within Pharmaceuticals, Specialty Pharmaceuticals revenues edged up 2% to $134 million, helped by favorable generic pricing and higher sales of branded products.

Active Pharmaceutical Ingredients revenues soared 21% to $102 million, buoyed by strong narcotics sales. Radiopharmaceuticals sales clipped 3% to $109 million as higher generator sales was more than offset by the declines in thallium and other products revenues. Contrast Products revenue edged up 1% to $145 million, backed by higher international sales.

Covidien, in late 2011, unveiled its plans to spin off its Pharmaceuticals business into a stand alone public company. The spin-off, which has been contemplated for years, is subject to regulatory clearances, final approval of the company’s Board and other closing conditions and is expected to take up to 18 months to complete.

Revenues from Covidien’s Medical Supplies segment were essentially flat year over year at $424 million as higher sales of medical surgical and nursing care products were offset by lower revenues from SharpSafety and OEM products.

Margins and Expenses

Gross margin improved to 58.7% from 56.7% a year-ago. On an adjusted basis, gross margin increased to 58.8% from 57.6% a year-ago owing to lower manufacturing costs, favorable mix, synergies from restructuring programs and favorable foreign exchange swings. Adjusted operating margin increased to 24.3% from 22.2% a year ago.

Selling, general and administrative expenses increased roughly 5% year over year on account of higher legal charges and investment on growth initiatives. Research and development expense spurted 21% year over year in the quarter.

Guidance and Recommendation

Based on a strong dollar and its first quarter sales growth, Covidien now envisages net sales for fiscal 2012 to leap 1%-3% year over year compared with its earlier guidance of 3%-5%. Moreover, the company now anticipates revenues from Medical Devices to grow 2%-5% year over year (versus its prior view of 4%-7%) in fiscal 2012.                            

The company has revised its growth forecast for the Pharmaceuticals segment to 1%-4% from 2%-5%. Revenues from the Medical Supplies division are now expected to be down 2% to flat year over year (versus flat year over year, earlier) in fiscal 2012.

However, adjusted (excluding one-time items) operating margin forecast for fiscal 2012 remains in the band of 22%-23%. Free cash flow is still projected to exceed $1.9 billion in fiscal 2012. The company’s guidance for the effective tax rate for the year remains between 17% and 18%.

Covidien is a leading global health care products company with a rich history of developing high-quality products in a cost-effective manner. It competes with Johnson & Johnson (JNJ - Analyst Report), Becton Dickinson (BDX - Analyst Report) and C.R. Bard (BCR - Analyst Report), among others.

Covidien remains committed to rolling out new products and technologies, focusing on emerging markets, and boosting market share in core segments through investments in sales and marketing infrastructure. However, sustained pricing/procedure volume pressure represents headwind. We are currently Neutral on the stock, supported by a short-term Zacks #3 Rank (Hold).

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