Covidien announces results for first-quarter of fiscal 2010

Jan 20 2010

Covidien plc (NYSE: COV) today reported results for the first quarter of fiscal 2010 (October – December 2009). First-quarter net sales of $2.7 billion were up 7% from the $2.6 billion reported a year ago, with favorable foreign exchange of $121 million increasing the quarterly sales growth rate by approximately 5 percentage points.

“Our excellent performance in the first quarter of fiscal 2010 reflected the success of ongoing strategic initiatives focused on innovation and growth”

Excluding $96 million in sales of oxycodone hydrochloride extended-release tablets (Oxy ER) in the first-quarter 2009, first-quarter 2010 net sales grew 11%, while operational growth (net sales growth, excluding the effect of foreign exchange) was 6%, driven primarily by higher volume and new products.

First-quarter 2010 gross margin of 54.3% rose 0.8 percentage points from the prior-year period. As shown on the attached Non-GAAP Reconciliations table, gross margin was up 2.5 percentage points from the 2009 adjusted gross margin of 51.8%. The first-quarter 2010 improvement reflected positive mix in all three segments, benefits from our restructuring program and favorable foreign exchange.

Selling, general and administrative expenses for the first quarter of fiscal 2010 were significantly higher than those of a year ago. The 2010 expenses included planned increases in selling and marketing, unfavorable foreign exchange and expenses related to recent acquisitions. Research and Development (R&D) expense in the quarter climbed 7% from that of the prior year and represented 3.7% of net sales.

In the first quarter, the Company reported operating income of $552 million, versus $544 million in the same period the year before. First-quarter 2010 adjusted operating income, excluding the specified items shown in the attached Non-GAAP Reconciliations table, was up 21% to $590 million, compared with $489 million the previous year. First-quarter adjusted operating income, excluding the specified items, represented 21.5% of sales, versus 19.8% a year ago.

The first-quarter effective tax rate was 21.1%. Excluding the specified items shown in the attached Non-GAAP Reconciliations table, the first-quarter tax rate was 22.6%.

Diluted GAAP earnings per share from continuing operations were $0.82 in the first quarter, versus $0.75 per share in the comparable quarter last year. First-quarter adjusted diluted earnings per share, excluding the specified items, were $0.86, versus $0.65 a year ago, a 32% increase.

“Our excellent performance in the first quarter of fiscal 2010 reflected the success of ongoing strategic initiatives focused on innovation and growth,” said Richard J. Meelia, Chairman, President and CEO. “Building on last year’s strong operational sales gains, we delivered exceptional growth in our largest business segment, Medical Devices, which generated broad-based improvement across its product lines. With higher-margin products increasing their contribution to all three Covidien business segments, our gross margin climbed sharply in the quarter, significantly exceeding our expectations. We are confident that this upward trend in margin improvement is sustainable and, as a result, we are raising our previously announced 2010 operating margin guidance.

“During the quarter, we continued to reshape and strengthen our portfolio, acquiring Aspect Medical Systems and announcing the sale of our U.S. radiopharmacies. We also received FDA approval for two major new Pharmaceutical products that we plan to launch in the next few months. We expect that these and other superior new products will fuel our growth in an increasingly competitive marketplace. We also expect to drive growth this year through key strategic investments funded by our continued strong cash flow,” Mr. Meelia said.

Results by business segment follow.

Medical Devices sales of $1.7 billion in the first quarter were 18% above the $1.4 billion in the comparable quarter of last year. Operational growth was 11%, reflecting new products and increased volume. Operationally, sales in Endomechanical advanced, as both laparoscopic instruments and stapling products registered good growth. The Energy double-digit quarterly sales gain was again due to a sharp increase in sales of vessel sealing products, partially offset by a continued slowdown in capital-related hardware products. In Soft Tissue Repair, sales of mesh and biosurgery products again rose rapidly, but growth in the product line was restrained by flat sales of sutures. In the Oximetry and Monitoring product line, sales gains were aided by the Aspect acquisition, as well as by higher sales of sensors. In Airway and Ventilation, the double-digit quarterly sales increase primarily reflected exceptional growth for ventilators, largely due to orders related to the H1N1 pandemic outside the United States. The increase was partially offset by lower sales of sleep products following the divestiture of the diagnostics product line. Vascular sales climbed at a strong double-digit pace, due to the addition of VNUS and Bacchus products, both of which surpassed our expectations, coupled with good growth in sales of compression products.

Pharmaceuticals sales of $616 million in the first quarter were 12% below the prior year’s $697 million, including favorable foreign exchange of about 2 percentage points to the 2010 quarterly results and Oxy ER contributing $96 million in sales to the year-ago quarter. Excluding both these factors, first-quarter sales were essentially unchanged. Sales in the quarter benefited from a double-digit increase in radiopharmaceuticals, aided by a supply situation that improved from the year before. Operationally, sales of contrast products were below those of a year ago. Sales of Active Pharmaceutical Ingredients and Specialty Chemicals both declined, due to lower volumes and weakness in microelectronic chemicals, respectively. Excluding Oxy ER, sales of Specialty Pharmaceuticals were even with those of the prior year, as higher sales of generic products were offset by lower branded sales.

Medical Supplies first-quarter sales of $443 million were 2% above the $435 million reported in the comparable quarter of the previous year. The increase was primarily due to favorable foreign exchange, which drove higher reported sales of Nursing Care and Medical Surgical products.

In the first quarter of fiscal 2010, Covidien purchased approximately 500,000 ordinary shares under its previously announced share buyback program.