Covidien plc (NYSE: COV) today reported results for the fourth quarter of fiscal 2010 (July - September 2010). Fourth-quarter net sales of $2.67 billion increased 3% from the $2.59 billion reported a year ago, with foreign exchange rate movement reducing the quarterly sales growth rate by approximately one percentage point.
“Although the market environment remains challenging, we are confident that our robust pipeline of new offerings, portfolio additions and strategic investments funded by our strong cash flow will drive positive operational results in 2011 and beyond.”
Fourth-quarter 2010 gross margin of 54.9% rose 0.6 percentage points from the 54.3% of the prior-year period. On an adjusted basis, fourth-quarter 2010 gross margin of 56.2% was 1.9 percentage points above that of a year ago. This improvement reflected positive mix in all three business segments, portfolio moves and benefits from our restructuring program, partially offset by unfavorable foreign exchange.
Selling, general and administrative expenses for the fourth quarter of 2010 were slightly below those of the comparable quarter of the year before. Research and Development (R&D) expense in the fourth quarter climbed 18% and represented 4.7% of net sales, versus 4.1% of sales in the year-ago period.
In the fourth quarter of 2010, the Company reported operating income of $443 million, versus $314 million in the same period the year before. Fourth-quarter 2010 adjusted operating income, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, was $547 million, compared with $526 million in the previous year. Fourth-quarter 2010 adjusted operating income, excluding the specified items, represented 20.5% of sales, versus 20.3% a year ago.
As a result of tax planning strategies implemented in the fourth quarter of 2010, the Company received a tax benefit in the quarter, versus an effective tax rate of 68.8% in the fourth quarter of 2009. The fourth-quarter 2010 adjusted tax rate, excluding specified items, was 15.3%, versus 26.7% in the fourth quarter a year earlier.
Diluted GAAP earnings per share from continuing operations were $0.77 in the fourth quarter of 2010, versus $0.25 per share in the comparable quarter last year. Fourth-quarter 2010 adjusted diluted earnings per share, excluding specified items, were $0.84, versus $0.71 a year ago, an 18% increase.
For fiscal 2010, net sales of $10.43 billion were 2% above the $10.26 billion in fiscal 2009, with favorable foreign exchange increasing the sales growth rate by approximately two percentage points. On an adjusted basis, excluding sales of oxycodone hydrochloride extended-release tablets (Oxy ER) from the 2009 base, net sales were 5% higher than those of the prior year. Favorable foreign exchange increased the sales growth rate by approximately two percentage points.
The Company reported operating income of $2.06 billion in fiscal 2010, versus $1.81 billion a year earlier. Fiscal 2010 adjusted operating income, excluding the specified items shown on the attached Non-GAAP reconciliations table, was $2.26 billion, versus $2.03 billion in the previous year, a gain of 12%. Excluding the specified items and Oxy ER in 2009, fiscal 2010 adjusted operating income represented 21.7% of sales, versus 20.4% the year before.
The effective tax rate was 18.8% for fiscal 2010, versus 47.9% in fiscal 2009. Excluding the specified items, the adjusted tax rate for 2010 was 19.5%, versus 25.9% in fiscal 2009.
For fiscal 2010, diluted GAAP earnings per share from continuing operations were $3.10, versus $1.86 for fiscal 2009. Excluding the specified items and Oxy ER in 2009, adjusted diluted earnings per share from continuing operations were $3.38, versus $2.78 a year ago, a 22% increase.
"We finished fiscal 2010 by again delivering improvement in our quarterly gross and operating margins, combined with double-digit earnings growth," said Richard J. Meelia, Chairman, President and CEO. "This solid performance was led by our largest business segment, Medical Devices, which posted another good quarter paced by strong gains in Vascular, Oximetry & Monitoring and Energy products.
"During 2010, we made significant progress in reshaping our portfolio, acquiring Aspect, ev3 and Somanetics, all of which are meeting or exceeding our expectations. We divested the Specialty Chemicals business, U.S. nuclear pharmacies, and sleep and oxygen product lines, reallocating resources to faster growing areas of our business. We launched more than 20 new products, including Tri-Staple™, LigaSure™ 5, TaperGuard™ and EXALGO®, all of which are doing well in the marketplace," Mr. Meelia said, adding that "Although the market environment remains challenging, we are confident that our robust pipeline of new offerings, portfolio additions and strategic investments funded by our strong cash flow will drive positive operational results in 2011 and beyond."
BUSINESS SEGMENT RESULTS
Medical Devices sales of $1.77 billion in the fourth quarter were 9% above the $1.63 billion in the comparable quarter of last year. Operational growth (net sales growth, excluding the effect of foreign exchange) was 10%, reflecting acquisitions, new products and increased volume, partially offset by divestitures. Operationally, fourth-quarter sales in Endomechanical advanced, driven by higher sales of stapling and laparoscopic products. In Soft Tissue Repair, biosurgery and fixation both registered good growth, while sales of mesh increased, though at a slower rate than in past quarters. 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, double-digit sales gains were primarily due to the Aspect acquisition. In Airway & Ventilation, sales were below those of a year ago, primarily due to the divestiture of the sleep product line, coupled with lower ventilator sales due to difficult comparisons with last year's flu-related volume. Vascular sales climbed more than 70%, reflecting the addition of ev3 products and double-digit increases for venous insufficiency and compression products. ev3's sales and profitability performance in the quarter exceeded our expectations and, as a result, the acquisition was only slightly dilutive to earnings per share.
For fiscal 2010, Medical Devices sales rose 11% to $6.72 billion from $6.06 billion in the prior year. Favorable foreign exchange contributed approximately three percentage points to the increase.
Pharmaceuticals sales of $465 million in the fourth quarter were down 12% from last year's fourth-quarter sales of $530 million. The decline primarily reflected the sale of the U.S. nuclear pharmacies business in the third quarter, coupled with a sales decline in Specialty Pharmaceuticals. Fourth-quarter sales of Contrast Products were above those of a year ago, primarily due to customer order patterns. Sales of Active Pharmaceutical Ingredients in the quarter increased somewhat from the year-before level, in part due to higher narcotic product sales. In Specialty Pharmaceuticals, generic sales declined, reflecting increased competitive activity which drove lower pricing versus a year ago. Compared with the third quarter 2010, however, generic pricing stabilized. In branded pharmaceuticals, sales of EXALGO and PENNSAID® did not offset a significant decline for Restoril and Tofranil that was related to competition from generics. Excluding the divestiture of the U.S. nuclear pharmacies business, sales of Radiopharmaceuticals were below those of a year ago, partially due to lower thallium sales.
Pharmaceuticals sales of $1.99 billion in fiscal 2010 decreased 5% from last year's $2.10 billion.
Medical Supplies fourth-quarter sales of $432 million were essentially unchanged from the $433 million reported in the comparable quarter of the previous year, as increased sales of Nursing Care and OEM products offset lower sales of Medical Surgical and SharpSafety products. For fiscal 2010, sales of Medical Supplies, at $1.72 billion, were 2% below last year's $1.75 billion.
In the fourth quarter of 2010, Covidien purchased approximately 6.6 million ordinary shares under its previously announced share buyback program.
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