Covidien's 2Q Beats, Profit Rises - Analyst Blog

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Covidien plc ( COV ), a large-cap medical technology company, reported its adjusted earnings per share (from continuing operations) of $1.05 for the second quarter of 2012, 2 cents above the Zacks Consensus Estimate and 12 cents higher than the year-ago quarter earnings. Adjusted earnings exclude one-time items and extraordinary charges.

Profits from continuing operations increased 7% to $491 million (or $1.01 a share). The company repurchased roughly 2.9 million shares in the quarter.


Revenues for the second quarter of 2012 rose 5% year over year to $2,946 million, beating the Zacks Consensus Estimate of $2,894 million. Currency exchange rate negatively impacted quarterly revenue by 1%.

On a geographic basis, revenues in the U.S. and international markets rose 5% each to $1,631 million and $1,315 million, respectively.

Segment Analysis

Revenues from the larger Medical Devices segment climbed 7% year over year to $2,004 million, driven by double-digit growth across Vascular and Energy Devices product lines. New products and higher volume contributed to growth.   

Within Medical Devices, revenues from Endomechanical Instruments increased 4% to $577 million helped by stapling products (including Tri-Staple). Revenues from Energy Devices soared 12% to $318 million boosted by strong vessel sealing sales. Sales of Soft Tissue Repair products inched up 1% to $222 million, as growth in the suture unit was partially masked by lower biosurgery and fixation sales.

Revenues from Oximetry and Monitoring sub-segment rose 4% to $220 million driven by higher sales of monitors. Vascular product sales jumped 17% to $390 million, backed by healthy growth across peripheral vascular, venous insufficiency and neurovascular offerings. However, sales of Airway & Ventilation sub-segment remained flat year over year at $185 million, as higher sales of airway products were offset by lower ventilator sales.

Revenues from Covidien's Pharma segment rose 4% to $508 million. This growth was primarily fueled by robust gains in the Specialty Pharmaceuticals and Radiopharmaceuticals businesses.  

Specialty Pharmaceuticals sales surged 34% to $142 million spurred by solid revenue from generic product and higher sales of branded offerings in the quarter. However, Active Pharmaceutical Ingredients and Contrast Product sales dropped 6% and 12% due to lower narcotics sales and sluggish U.S. markets, respectively. Revenues from Radiopharmaceuticals increased 7% on the back of healthy generator sales.

Sales from Medical Supplies segment were virtually flat year over year at $434 million in the second quarter as higher sales of medical surgical and Original Equipment Manufacturer ("OEM") products were offset by lower revenues from SharpSafety and nursing offerings. 


Gross margin improved to 57.9% in the second quarter from 57% in the year-ago comparable period. On an adjusted basis, gross margin increased to 58.1% from 57.3% in the prior year-quarter. The improvement was attributable to lower manufacturing costs and a favorable mix. Adjusted operating margin stood at 22.1% compared with 22.2% a year ago.

The company plans to expand in emerging markets and hence it has increased its selling, general and administrative (SG&A) and research and development (R&D) spending. Selling, general and administrative expenses were higher at 31% of sales in the second quarter of 2012 compared with 30.5% of sales in the year-ago quarter. R&D expense spiked to 5.7% of revenues versus 4.6% in the prior year period.

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 ), Becton Dickinson ( BDX ) and C.R. Bard ( BCR ), 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. It has launched 100 new products over the last five years and is on track to introduce another 50 products over the next two years.

However, sustained pricing/procedure volume pressure represents a headwind. We are currently Neutral on the stock, supported by a short-term Zacks #3 Rank (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: BCR , BDX , JNJ

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