Covidien plc (NYSE: COV) today reported results for the third quarter of fiscal 2010 (April - June 2010). Third-quarter net sales of $2.56 billion increased 2% from the $2.52 billion reported a year ago, with foreign exchange rate movement having no impact on the quarterly sales growth rate.
“We again delivered significant improvement in our quarterly gross and operating margins, while making the incremental investments needed to accelerate our growth. We are pleased with this continued upward trend in margin improvement”
Third-quarter 2010 gross margin of 55.6% rose 1.2 percentage points from the 54.4% of the prior-year period. This improvement reflected positive mix in the Medical Devices segment, benefits from our restructuring program and favorable foreign exchange.
Selling, general and administrative expenses for the third quarter of 2010 were slightly higher than those of the comparable quarter of the year before. Research and Development (R&D) expense in the third quarter represented 4.3% of net sales, versus 5.2% of sales in the year ago period. Third-quarter 2009 R&D expense included $30 million in licensing fees related to two transactions in the Pharmaceuticals segment.
In the third quarter of 2010, the Company reported operating income of $539 million, versus $441 million in the same period the year before. Third-quarter 2010 adjusted operating income, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, was $569 million, compared with $535 million in the previous year. Third-quarter 2010 adjusted operating income, excluding the specified items, represented 22.2% of sales, versus 21.3% a year ago.
The third-quarter 2010 effective tax rate was 31.3%, versus 33.9% in the third quarter of 2009. The third-quarter 2010 adjusted tax rate, excluding specified items, was 20.5% versus 25.6% in the prior year.
Diluted GAAP earnings per share from continuing operations were $0.70 in the third quarter of 2010, versus $0.54 per share in the comparable quarter last year. Third-quarter adjusted diluted earnings per share, excluding specified items, were $0.85, versus $0.74 a year ago, a 15% advance.
For the first nine months of 2010, net sales of $7.76 billion were 1% above the $7.67 billion in the comparable period of the prior year, with favorable foreign exchange increasing the sales growth rate by approximately 3 percentage points. On an adjusted basis, excluding sales of oxycodone hydrochloride extended-release tablets (Oxy ER) from the 2009 base, net sales were 6% higher than those of the prior year. Favorable foreign exchange increased the sales growth rate by approximately 3 percentage points.
The Company reported operating income of $1.62 billion in the first nine months of 2010, versus $1.50 billion in the comparable period a year earlier. Nine-month 2010 adjusted operating income, excluding the specified items shown on the attached nine-month Non-GAAP reconciliations table, was $1.71 billion, versus $1.50 billion in the previous year, a gain of 14%. Nine-month 2010 adjusted operating income, excluding the specified items and Oxy ER, represented 22.1% of sales, versus 20.5% the year before.
The effective tax rate was 24.0% for the first nine months of 2010. Excluding the specified items, the adjusted tax rate for this period was 20.8%.
For the first nine months of 2010, diluted GAAP earnings per share from continuing operations were $2.33, versus $1.62 for the first nine months of 2009. Excluding the specified items and Oxy ER, adjusted diluted earnings per share from continuing operations were $2.54, versus $2.07 a year ago, a 23% increase.
"We again delivered significant improvement in our quarterly gross and operating margins, while making the incremental investments needed to accelerate our growth. We are pleased with this continued upward trend in margin improvement," said Richard J. Meelia, Chairman, President and CEO. "Although top-line performance, particularly in Pharmaceuticals, did not meet our expectations, our largest business segment, Medical Devices, posted another good quarter, led by strong growth for Oximetry & Monitoring, Vascular and Energy products.
"Since the quarter ended, we have completed two significant acquisitions, ev3 and Somanetics. Both are excellent additions to our product portfolio and we are now integrating them into our operations. During the quarter, we launched two major Pharmaceutical products, PENNSAID® and EXALGO™, both of which are doing well in the marketplace. By the end of the fiscal year, we expect to complete the next step in reshaping our portfolio by concluding the sale of the Specialty Chemicals business. We remain confident that we have the portfolio, products and programs required to deliver strong operational results, aided by our substantial cash flow," Mr. Meelia said.
BUSINESS SEGMENT RESULTS
Medical Devices sales of $1.63 billion in the third quarter were 6% above the $1.54 billion in the comparable quarter of last year. Operational growth was 5%, reflecting new products and increased volume. Operationally, sales in Endomechanical advanced, driven by higher sales of stapling products. In Soft Tissue Repair, sales of mesh and biosurgery products 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. Sales of capital-related hardware products also increased off the depressed base of a year ago. In the Oximetry & Monitoring product line, sales gains were aided by the Aspect acquisition. In Airway & Ventilation, sales were below those of a year ago, primarily due to 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 and higher sales of compression products.
For the first nine months, Medical Devices sales rose 11% to $4.94 billion from $4.43 billion in the comparable period of the prior year. Favorable foreign exchange contributed approximately 4 percentage points to the increase.
Pharmaceuticals sales of $507 million in the third quarter were down 6% from last year's third-quarter sales of $539 million. Sales of Specialty Pharmaceuticals were below those of the prior year, as new products did not offset lower sales of existing products. Generic products posted sharply decreased sales versus last year, primarily due to increased competitive activity, which is driving lower pricing, coupled with distributor inventory contraction. In branded pharmaceuticals, sales of the newly launched EXALGO and PENNSAID products more than offset a significant decline for Restoril and Tofranil, reflecting competition from generics. Operationally, quarterly sales of Active Pharmaceutical Ingredients and Contrast Products declined somewhat from those of the year before. Sales of Radiopharmaceuticals were also below those of a year ago, largely reflecting the sale of the U.S. nuclear pharmacy business during the quarter.
Sales of $1.53 billion in the first nine months decreased 21% from last year's $1.92 billion, which included $354 million of Oxy ER sales. Excluding Oxy ER from the 2009 base, Pharmaceuticals sales declined 3% in the first nine months.
Medical Supplies third-quarter sales of $427 million were 3% below the $439 million reported in the comparable quarter of the previous year. The decrease was largely due to lower sales of SharpSafety and Nursing Care products. For the first nine months, sales of Medical Supplies, at $1.29 billion, were 2% below last year's $1.32 billion.
In the third quarter of 2010, Covidien purchased approximately 520,000 ordinary shares under its previously announced share buyback program.
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