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International medical technology major Covidien plc exited fiscal 2011 (ended Sep 30) on a strong note, buoyed by strength of its core Medical Devices business.

The Ireland-based company posted fourth-quarter fiscal 2011 adjusted earnings per share (from continuing operation) of $1.08, topping the Zacks Consensus Estimate by three cents and exceeding the year-ago earnings of 84 cents. Adjusted earnings exclude one-time items such as restructuring and legal charges and tax-related adjustments.

Net income (from continuing operation) for the quarter surged roughly 18.5% year over year to $460 million (or 93 cents a share), powered by growth across the board. The company witnessed healthy double-digit growth in its Medical Devices franchise.

For the fiscal, adjusted earnings of $3.97 a share also outperformed the Zacks Consensus Estimate of $3.94 and surpassed the year-ago earnings of $3.38.

Revenues and Margins

Net sales for the quarter soared 15% year over year to $3,078 million, beating the Zacks Consensus Estimate of $3,027 million. Foreign exchange movements contributed roughly 4% to growth. Moreover, sales benefited from an extra selling week in the quarter.

Geographically, revenues in the U.S. and international markets surged 12% and 20%, respectively, to $1,678 million and $1,400 million, respectively.

For fiscal 2011, revenues spiked 11% year over year to $11,574 million, also ahead of the Zacks Consensus Estimate of $11,518 million. Sales in both the fourth quarter and fiscal 2011 were aided by new product roll outs, market share gains and strong execution.

Gross margin for the quarter rose to 56.5% from 54.9% a year-ago owing to favorable mix, synergies from restructuring programs and favorable foreign exchange movements. Adjusted operating margin increased to 22.3% from 20.5% a year ago.

Segment Analysis

Medical Devices sales zoomed 18% year over year to $2.09 billion in the fourth quarter, largely driven by solid sales of Vascular and Energy Devices product-lines with acquisitions, new products and higher volume contributing to the growth.

Within medical devices, Endomechanical Instruments revenues jumped 17% to $624 million, boosted by stapling products (including Tri-Staple). Revenues from Energy Devices cruised 22% to $316 million, powered by strong vessel sealing sales. Soft Tissue Repair products sales rose 8% to $230 million. Growth in the suture business continues to be partly offset by lower mesh, fixation and biosurgery sales.

Revenues from Oximetry and Monitoring climbed 18% to $226 million, driven by higher sales of sensors and acquisitions. Airway and Ventilation products sales rose 7% to $198 million with increase in airway product revenues, which were somewhat neutralized by lower ventilator sales.

Vascular business posted the strongest growth in the quarter with revenues ballooning 36% to $393 million, buoyed by new products, eV3 acquisition and healthy growth of venous insufficiency products.

After registering declines in the first three quarters of  fiscal 2011, Covidien’s Pharmaceuticals division returned to growth with revenues rising 8% to $507 million. The growth was triggered by favorable currency exchange swings and strong gains in the Specialty Pharmaceuticals business.

Within Specialty Pharmaceuticals, generic product revenues went up at a double-digit clip on the back of the fentanyl patch roll out and stabilization in generic pricing. The company also saw higher sales for branded products in the quarter.

Active Pharmaceutical Ingredients revenues leapt 12% to $104 million, spurred by higher acetaminophen sales. Radiopharmaceuticals sales jumped 16% to $122 million on higher generator sales. Contrast Products business bucked the positive trend with revenues slipping 14% to $144 million, largely attributable to a difficult year-over-year comparison.

Revenues from Covidien’s Medical Supplies segment climbed 11% to $481 million riding on higher medical surgical and nursing care product sales.

Cash Flows & Shareholder Returns

Covidien generated free cash flows of around $1.7 billion in fiscal 2011, essentially in line with its guidance. The company bought back roughly 11.7 million shares in the fourth quarter under its earlier announced repurchase program.

Outlook and Recommendation

Covidien envisages net sales for fiscal 2012 to leap 3%-5% year over year, unchanged from its earlier guidance released in September 2011. Moreover, the company still anticipates revenues from Medical Devices, its principal growth engine, to grow 4%-7% year over year in fiscal 2012.

Covidien expects sales from its Pharmaceuticals segment to nudge up 2%-5% in fiscal 2012. Revenues from the Medical Supplies division are expected to be flat year over year.

Adjusted (excluding one-time items) operating margin for fiscal 2012 has been forecast in the band of 22%-23%. Free cash flow is projected to exceed $1.9 billion in fiscal 2012. The company has, however, tweaked its guidance for an effective tax rate for the year which is now expected between 17% to 18% (down from 18% and 19%).

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 - Free Report) , Becton Dickinson (BDX - Free Report) and C.R. Bard (BCR - Free 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.

Moreover, the company is expanding its portfolio through acquisitions and strategic collaborations. Covidien also remains focused on achieving its long-term target of mid single-digit revenues and double-digit earnings growth. However, sustained pricing/procedure volume pressure and rising raw material costs represent headwinds. We are currently Neutral on Covidien, supported by a short-term Zacks #3 Rank (Hold).

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