Covidien third quarter net sales increase 14% to $2.93 billion

Jul 26 2011

Covidien plc (NYSE: COV) today reported results for the third quarter of fiscal 2011 (April - June 2011). Net sales of $2.93 billion increased 14% from the $2.56 billion reported in the third quarter a year ago. Foreign exchange rate movement added approximately five percentage points to the quarterly sales growth rate.

Third-quarter 2011 gross margin of 57.1% was up 1.5 percentage points from the 55.6% reported in the prior-year period. This improvement was due to positive business mix, ongoing benefits from the Company's restructuring programs and favorable foreign exchange.

Selling, general and administrative expenses for the third quarter of 2011 were well above 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 third quarter climbed 27% and represented 4.7% of net sales, versus 4.3% of sales in the year-ago period.

In the third quarter of 2011, the Company reported operating income of $615 million, versus $539 million in the same quarter the year before. Third-quarter 2011 adjusted operating income, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, was $647 million, compared with $569 million in the previous year. Third-quarter 2011 adjusted operating income, excluding the specified items, represented 22.1% of sales, versus 22.2% in the year-ago period.

The third-quarter 2011 effective tax rate was 4.7%, versus an effective tax rate of 31.3% in the third quarter of 2010. The decrease in the effective tax rate for the third quarter of 2011, compared to the prior year period, resulted primarily from a favorable settlement reached with certain non-U.S. taxing authorities. The third-quarter 2011 adjusted tax rate, excluding specified items, was 16.8%, versus 20.5% in the third quarter a year ago.

Diluted GAAP earnings per share from continuing operations were $1.06 in the third quarter of 2011, versus $0.70 per share in the comparable quarter last year. Third-quarter 2011 adjusted diluted earnings per share, excluding specified items, were $1.01, versus $0.85 a year ago, a 19% increase.

For the first nine months of fiscal 2011, net sales of $8.50 billion were 9% above the $7.76 billion in the previous year, with foreign exchange rate movement adding approximately two percentage points to the nine-month sales growth rate.

The Company reported operating income of $1.78 billion in the first nine months of 2011, versus $1.62 billion in the comparable period a year earlier. Nine-month 2011 adjusted operating income, excluding the specified items, was $1.88 billion, versus $1.71 billion in the previous year's first nine months. Nine-month 2011 adjusted operating income, excluding specified items, represented 22.2% of sales, versus 22.1% a year ago.

The effective tax rate was 13.4% for the first nine months of 2011, versus an effective tax rate of 24.0% in the same period of 2010. Excluding the specified items, the adjusted tax rate for the first nine months of 2011 was 18.3%, versus 20.8% in the first nine months of 2010.

For the first nine months of 2011, diluted GAAP earnings per share from continuing operations were $2.85, versus $2.33 for the first nine months of 2010. Excluding the specified items, adjusted diluted earnings per share from continuing operations were $2.89, versus $2.54 a year ago, a 14% gain.

"We delivered another strong quarter, and, for the fourth quarter in a row, results significantly exceeded our own expectations," said Jose´ E. Almeida, President and CEO. "These results were spurred by the performance of our largest business segment, Medical Devices, which again reported substantial growth that was led by excellent increases for Vascular and Energy products. We continued to benefit from several successful new product launches and from market share gains in an increasingly competitive global healthcare marketplace.

"Once again, we significantly improved our quarterly gross margin, increased our investments in R&D and generated double-digit earnings growth," Mr. Almeida said. "We also funded incremental investments in our business that were fueled by our strong cash flow and that should drive future growth. In the last 12 months, we have returned over $1 billion in cash to shareholders through dividends and share buybacks, representing more than 50% of our free cash flow. Our overall Company performance remains on plan, and we are confident we will have a strong finish to the fiscal year."

BUSINESS SEGMENT RESULTS

Medical Devices sales of $1.99 billion in the third quarter climbed 22% from the $1.63 billion in the comparable quarter of last year. Operational growth was 15%, driven by acquisitions, new products and greater volume. Operationally, third-quarter sales in Endomechanical were above those of the prior year, paced by a good increase for stapling products, but slower growth for instruments. In Soft Tissue Repair, sales advanced from those of a year ago, as higher sales for sutures were partially offset by a decline for mesh and biosurgery products. The Energy double-digit quarterly sales gain was again due to a sharp rise in sales of vessel sealing products. In Oximetry & Monitoring, monitors registered a strong double-digit increase, coupled with good growth for sensors. In Airway & Ventilation, operational sales were below those of the year before, chiefly due to lower ventilator sales, 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 venous insufficiency products.

For the first nine months of 2011, Medical Devices sales rose 16% to $5.74 billion from $4.94 billion in the comparable period of the prior year. Favorable foreign exchange contributed approximately three percentage points to the increase.

Pharmaceuticals sales of $500 million in the third quarter were down 1% from last year's third-quarter sales of $507 million. Foreign exchange rate movement added approximately three percentage points to the third-quarter sales change. The decline stemmed from the sale of the U.S. nuclear pharmacies business in the third quarter of 2010, coupled with lower sales of Specialty Pharmaceuticals. In Specialty Pharmaceuticals, generic sales were up at a strong double-digit pace, reflecting the launch of the fentanyl patch, growth for fentanyl lozenge and a stabilization of generic pricing seen over the last several quarters. The gain in generics did not, however, offset a significant decline for branded products that resulted primarily from the inventory stocking for PENNSAID^® and EXALGO^® in the year-ago period. Third-quarter sales of Contrast Products were above those of the prior year, due to favorable foreign exchange. Excluding the impact of the divestiture of the U.S. nuclear pharmacies business, sales of Radiopharmaceuticals were above those of the year before, as higher generator sales more than countered lower sales of thallium and other products. Sales of Active Pharmaceutical Ingredients advanced from the year-ago level, as increased sales of acetaminophen more than offset lower narcotics and peptide sales.

For the first nine months of 2011, Pharmaceuticals sales fell 4% to $1.46 billion from $1.53 billion a year ago. The decrease was primarily due to the divestiture of the U.S. nuclear pharmacies business.

Medical Supplies third-quarter sales of $441 million rose 3% from the $427 million reported in the comparable quarter of the previous year, paced by higher sales of Medical Surgical and Nursing Care products. The Medical Surgical gain was attributable to increased sales of the new Kendall™ DL disposable lead wires, while the growth in Nursing Care was led by enteral feeding and incontinence products.

For the first nine months of 2011, sales of Medical Supplies, at $1.30 billion, were essentially unchanged from last year's $1.29 billion.

In the third quarter of 2011, Covidien purchased approximately 4.9 million ordinary shares under its previously announced share buyback program.

During the third quarter, Covidien launched a restructuring program, designed to improve its cost structure. This program includes actions in all three segments as well as corporate. The Company expects to incur pre-tax charges of approximately $275 million as the specific actions required to execute on these initiatives are identified and approved, most of which are expected to be incurred by the end of fiscal 2014. Savings from the restructuring program are estimated at $175 million to $225 million on an annualized basis once the program is completed.

Source: COVIDIEN