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Covidien plc.’s (COV - Analyst Report) adjusted earnings per share (EPS) from continuing operations of $1.12 for the second quarter of fiscal 2013 beat the Zacks Consensus Estimate of $1.10 by 1.8%. It exceeded the year-ago EPS by 6.7%.

Adjusted earnings exclude one-time items such as tax-related expenses, restructuring and acquisition related charges along with extraordinary expenses associated with the divestment of the Pharmaceutical segment.

For the quarter under review, net income from continuing operations (as reported) dropped 10.2% to $441 million (or 93 cents a share) due to higher expenses, which dampened solid sales growth.

Covidien’s core Medical Devices is growing at a healthy pace, particularly in certain key categories. Moreover, the company is gaining considerable traction in emerging markets, led by its portfolio reshaping initiatives toward high-growth/high-margin businesses. The company remains on track to spin off its Pharmaceutical business by mid-2013.

Revenue

Revenues for the second quarter of 2013 increased 5% year over year (up 7% in constant currency) to $3,103 million, boosted by higher sales in the Medical Devices segment. Sales were slightly ahead of the Zacks Consensus Estimate of $3,100 million.

On a geographic basis, revenues in the U.S. market increased 5% to $1,713 million. International sales grew 6% (up 9% in constant currency) to $1,390 million, driven by emerging market growth.

Segment Analysis

Revenues from the larger Medical Devices segment increased 4% (up 6% in constant currency) year over year to $2,091 million. The division is benefiting from new product offerings and higher volume.

Within Medical Devices, revenues from Endomechanical Instruments climbed 4% to $602 million, led by solid gains from Tri-Staple reloads. Sales of Soft Tissue Repair products remained flat at $222 million. Further, Airway & Ventilation sub-segment sales rose 3% to $190 million, boosted by the acquisition of Newport Medical and strong growth in ventilator sales.

Revenues from Energy Devices climbed 7% to $339 million, again reflecting strong double digit vessel sealing sales. Revenues from Oximetry and Monitoring sub-segment surged 14% to $250 million, owing to higher sales of monitors and sensors. Moreover, Vascular product sales grew 4% to $404 million, backed by solid growth across neurovascular, peripheral vascular and chronic venous insufficiency offerings, offset by depressed compression products sale.

Revenues from Covidien’s Pharmaceuticals segment jumped 13% year over year to $573 million on the back of robust gains in sales of generic products.
    
Specialty Pharmaceuticals sales soared 53% to $217 million spurred by solid revenue from the newly launched Concerta ER tablets and the Exalgo product. Active Pharmaceutical Ingredients sales increased 11% mainly due to higher narcotic product sales. But Contrast Product sales declined 13% because of lower sales of Optiray in the U.S. Revenues from Radiopharmaceuticals were down 5% in the quarter.

Sales from Medical Supplies segment inched up 1% to $439 million in the quarter as increased sales of Nursing Care offerings was offset by soft SharpSafety and OEM product sales.
 
Margins

Gross margin was 57.6% in the first quarter compared to 57.9% in the year-ago comparable period. On an adjusted basis, gross margin was 57.6% versus 58.1% in the prior year-quarter. Unfavorable raw material costs in the pharma segment along with a reactor shutdown offset improved productivity and favorable business mix.

Selling, general and administrative expenses were higher at 31.2% of sales in the reported quarter compared with 31.0% of sales in the year-ago quarter due to increased costs associated with acquisitions, divestment, and the medical device excise tax as well as sales and marketing initiatives in emerging markets. R&D expenses were down to 5.2% of revenues versus 5.7% in the prior-year period. Adjusted operating margin stood at 22.2% compared with 22.1% a year ago.

Others

Covidien repurchased roughly 3.2 million ordinary shares under its share buyback program in the second quarter.

Guidance

The company refrained from providing any guidance for 2013 until the spin-off of the Pharmaceutical unit is complete. It will announce guidance, excluding Pharma, after the market closes on May 3. The company will also provide a separate fiscal 2013 guidance for Mallinckrodt plc on that date.

The fiscal 2013 Zacks Consensus Estimates for revenues and earnings are $11,845 million and $4.50 per share, respectively.

About the Company

Covidien is a leading global health care products company with an impressive history of developing and manufacturing high quality products in a cost-effective manner. The company boasts of a well diversified product and technology portfolio.

The company is adequately placed to achieve its long-term revenue and earnings growth targets based on its attractive fundamentals, strategic R&D investment, effective execution, new product cycle and expansion into emerging markets. It is also enhancing shareholders’ value through dividends and share repurchases, leveraging healthy free cash flows and strong earnings power.

However, Covidien faces stiff competition and remains exposed to pricing and utilization headwinds, along with acquisition risks. We remain concerned about the tepid U.S. health services industry and the soft European economy. Also, foreign exchange translation is expected to dampen growth.

Covidien currently carries a short-term Zacks #3 Rank (Hold). Other companies like NuVasive (NUVA - Snapshot Report), Exactech (EXAC - Snapshot Report) and Perrigo (PRGO - Analyst Report), are expected to do well in the medical industry. NuVasive carries a Zacks Rank #1 (Strong Buy) while the other two stocks carry Zacks Rank #2 (Buy).

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