Covidien second quarter net sales up 10% to $2.80 billion

Covidien plc (NYSE: COV) today reported results for the second quarter of fiscal 2011 (January - March 2011). Net sales of $2.80 billion increased 10% from the $2.55 billion reported in the second quarter a year ago. Foreign exchange rate movement added approximately two percentage points to the quarterly sales growth rate.

“Our double-digit top line gain was again fueled by our largest business segment, Medical Devices, which recorded another excellent quarter paced by energy and vascular products.”

Second-quarter 2011 gross margin of 57.0% was unchanged from the prior-year period. On an adjusted basis, second-quarter 2011 gross margin of 57.3% was 0.3 percentage points above that of a year ago. This improvement reflected positive business mix and ongoing benefits from the Company's restructuring program, partially offset by unfavorable foreign exchange.

Selling, general and administrative expenses for the second quarter of 2011 were higher than those of the comparable quarter of the year before, primarily reflecting expenses related to recent acquisitions and new product launches. Research and Development (R&D) expense in the second quarter increased 14% and represented 4.6% of net sales, versus 4.5% of sales in the year-ago period.

In the second quarter of 2011, the Company reported operating income of $615 million, versus $545 million in the same period the year before. Second-quarter 2011 adjusted operating income, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, was $621 million, compared with $571 million in the previous year. Second-quarter 2011 adjusted operating income, excluding the specified items, represented 22.2% of sales, versus 22.4% a year ago.

The second-quarter 2011 effective tax rate was 19.5%, versus an effective tax rate of 20.2% in the second quarter of 2010. The second-quarter 2011 adjusted tax rate, excluding specified items, was 19.8%, versus 19.7% in the second quarter last year.

Diluted GAAP earnings per share from continuing operations were $0.92 in the second quarter of 2011, versus $0.83 per share in the comparable quarter of the prior year. Second-quarter 2011 adjusted diluted earnings per share, excluding specified items, were $0.93, versus $0.86 a year ago, an 8% increase.

For the first six months of fiscal 2011, net sales of $5.57 billion were 7% above the $5.20 billion in the previous year, with foreign exchange rate movement having no impact on the six-month sales growth rate.

The Company reported operating income of $1.16 billion in the first six months of fiscal 2011, versus $1.08 billion in the comparable period of the year before. Six-month adjusted operating income, excluding the specified items, was $1.24 billion, versus $1.15 billion in the previous year. Six-month 2011 adjusted operating income, excluding specified items, represented 22.2% of sales, versus 22.0% a year ago.

The effective tax rate was 17.9% for the first six months of fiscal 2011, versus an effective tax rate of 20.4% in the same period of 2010. Excluding the specified items, the adjusted tax rate for the first six months of 2011 was 19.1%, versus 21.0% in the first six months of 2010.

For the first six months of 2011, diluted GAAP earnings per share from continuing operations were $1.79, versus $1.63 in the year-ago period. Excluding the specified items, adjusted diluted earnings per share from continuing operations were $1.88, versus $1.69 in the comparable period last year, an 11% increase.

"Our solid second-quarter results continued the strong performance we have delivered for the last several years," said Richard J. Meelia, Chairman, President and CEO. "Our double-digit top line gain was again fueled by our largest business segment, Medical Devices, which recorded another excellent quarter paced by energy and vascular products.

"The investments we've made to ramp up R&D spending continue to pay off with a steady stream of exciting new products," Mr. Meelia said. "New entries such as the LigaSure™ 5 laparoscopic instrument and Tri-Staple™ products are generating significant advances in the marketplace, and we expect similarly positive results for the recently launched LigaSure small jaw instrument, fentanyl patch and Pipeline^® Embolization Device. These and other new products will likely be key contributors to our future growth in a global marketplace that has become increasingly competitive. We also plan to drive growth this year through incremental investments in our business that are funded by our continued strong cash flow."

BUSINESS SEGMENT RESULTS

Medical Devices sales of $1.88 billion in the second quarter were 16% above the $1.62 billion in the comparable quarter of last year, with growth paced by acquisitions, new products and increased volume. Favorable foreign exchange added approximately two percentage points to the quarterly sales growth rate. Second-quarter sales in Endomechanical were above those of the prior year, driven by a double-digit gain for stapling products. In Soft Tissue Repair, sales climbed from those of a year ago, fueled by an increase for sutures and partially offset by a decline for biosurgery. The Energy double-digit quarterly sales gain was again due to a sharp rise in sales of vessel sealing products. In the Oximetry & Monitoring product line, sales of both sensors and monitors were well above those of a year ago, aided by the Somanetics acquisition. In Airway & Ventilation, sales fell well below those of the year before, chiefly due to difficult comparisons with last year's flu-related volume, coupled with the divestiture of the sleep therapy product line. Vascular sales more than doubled, reflecting the addition of ev3 products and, to a lesser extent, double-digit growth for compression and venous insufficiency products.

For the first six months of fiscal 2011, Medical Devices sales rose 13% to $3.75 billion from $3.31 billion in the comparable period a year ago. Favorable foreign exchange contributed approximately one percentage point to the increase.

Pharmaceuticals sales of $490 million in the second quarter were down 4% from last year's second-quarter sales of $508 million. The decline reflected the sale of the U.S. nuclear pharmacies business in the third quarter of 2010. Second-quarter sales of Contrast Products were above those of the prior year, primarily due to continued strong growth outside the U.S. Sales of Active Pharmaceutical Ingredients advanced from the year-ago level, as higher sales of acetaminophen more than offset lower narcotics sales. In Specialty Pharmaceuticals, generic sales were up slightly, reflecting the launch of the fentanyl patch and a stabilization of generic pricing seen over the last several quarters. In branded pharmaceuticals, sales of our new EXALGO^® and PENNSAID^® products did not offset a significant decline for our older brands, which stemmed from competition from generics. Excluding the impact of the divestiture of the U.S. nuclear pharmacies business, sales of Radiopharmaceuticals were above those of the prior year, as higher generator sales more than countered lower sales of thallium and other products.

For the first six months of fiscal 2011, Pharmaceuticals sales decreased 6% to $960 million from $1.02 billion a year ago. The decline was primarily due to the divestiture of the U.S. nuclear pharmacies.

Medical Supplies second-quarter sales of $434 million were 3% above the $421 million reported in the comparable quarter of the previous year, principally due to higher sales of Medical Surgical and Nursing Care products. The Medical Surgical gain was attributable to a strong performance for the new Kendall™ DL disposable lead wires, while the Nursing Care increase was led by enteral feeding products.

For the first six months of fiscal 2011, sales of Medical Supplies, at $856 million, were 1% below last year's $864 million, largely due to lower sales of SharpSafety™ products and unfavorable foreign exchange rates.

FISCAL 2011 OUTLOOK

Covidien has updated its fiscal 2011 guidance to reflect the recent weakening of the U.S. dollar against most currencies and its strong operational performance in the first half of the fiscal year. The Company now estimates that net sales in fiscal 2011 will be up 8% to 11%, including foreign exchange at current rates. This compares with prior guidance of a 6% to 9% sales increase in 2011. Net sales are now expected to be up 13% to 16% versus 2010 in the Medical Devices segment and down 3% to flat in the Pharmaceuticals segment. There is no change to the guidance for the Medical Supplies segment, flat to up 3%. Operating margin, excluding the impact of one-time items, is now expected to be in the 21.5% to 22.5% range. This compares with prior guidance of 21% to 22%. The effective tax rate, excluding one-time items, is now expected to be in the 18.5% to 19.5% range, compared with prior guidance of 18.4% or below. The Company now estimates that free cash flow (net cash provided by continuing operating activities less capital expenditures) will be $1.7 billion or higher, excluding any legacy tax payments, versus prior guidance of $1.6 billion or higher.