Covidien first-quarter net sales increase 5% to $2.77 billion

Covidien plc (NYSE: COV) today reported results for the first quarter of fiscal 2011 (October-December 2010). First-quarter net sales of $2.77 billion increased 5% from the $2.64 billion reported a year ago. Foreign exchange rate movement had no impact on the quarterly sales growth rate.

“Integration of our 2010 acquisitions -- Aspect, ev3 and Somanetics -- is proceeding as planned, and all three businesses are meeting or exceeding our expectations”

First-quarter 2011 gross margin of 56.7% rose 1.5 percentage points from the 55.2% of the prior-year period. On an adjusted basis, first-quarter 2011 gross margin of 57.6% was at a record quarterly level, 2.4 percentage points above that of a year ago. This improvement reflected positive business mix, recent portfolio moves, manufacturing cost savings and benefits from our restructuring program.

Selling, general and administrative expenses for the first quarter of 2011 were above those of the comparable quarter of the year before, reflecting acquisition-related expenses and costs for product launches in Pharmaceuticals. Research and Development (R&D) expense in the first quarter climbed 21% and represented 4.3% of net sales, versus 3.7% of sales in the year-ago period.

In the first quarter of 2011, the Company reported operating income of $549 million, versus $536 million in the same period the year before. First-quarter 2011 adjusted operating income, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, was $615 million, compared with $574 million in the previous year. First-quarter 2011 adjusted operating income, excluding the specified items, represented 22.2% of sales, versus 21.7% a year ago.

The first-quarter 2011 effective tax rate was 16.1%, versus an effective tax rate of 20.6% in the first quarter of 2010. The first-quarter 2011 adjusted tax rate, excluding specified items, was 18.4%, versus 22.2% in the first quarter a year earlier.

Diluted GAAP earnings per share from continuing operations were $0.87 in the first quarter of 2011, versus $0.80 per share in the comparable quarter last year. First-quarter 2011 adjusted diluted earnings per share, excluding specified items, were $0.95, versus $0.84 a year ago, a 13% increase.

"We are off to a very good start in fiscal 2011, with record gross margin, continued solid improvement in operating margin and double-digit EPS growth," said Richard J. Meelia, Chairman, President and CEO. "The excellent performance of our largest business segment, Medical Devices, was paced by strong gains in Vascular, Oximetry & Monitoring and Energy products.

"Integration of our 2010 acquisitions -- Aspect, ev3 and Somanetics -- is proceeding as planned, and all three businesses are meeting or exceeding our expectations," Mr. Meelia said. "We continue to make the growth-driving investments that will propel our business forward, such as our substantial increase in R&D spending and our growth initiative for emerging markets. Although we face some market-related softness in certain businesses, we are confident that our solid portfolio additions, robust pipeline of significant offerings across our businesses and strategic investments funded by our strong cash flow will drive superior operational results for the remainder of 2011 and beyond."

BUSINESS SEGMENT RESULTS

Medical Devices sales of $1.88 billion in the first quarter were 11% above the $1.69 billion in the comparable quarter of last year. Growth was driven by acquisitions, new products and increased volume, partially offset by divestitures. First-quarter sales in Endomechanical were above last year, driven largely by higher sales of stapling products. In Soft Tissue Repair, sales were above those of a year ago, paced by a good increase for sutures, 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, double-digit sales growth was primarily attributable to the Aspect and Somanetics acquisitions. In Airway & Ventilation, sales were 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 climbed more than 80%, reflecting the addition of ev3 products and, to a lesser extent, growth for venous insufficiency and compression products.

Pharmaceuticals sales of $470 million in the first quarter were down 8% from last year's first-quarter sales of $511 million. The decline primarily reflected the sale of the U.S. nuclear pharmacies business in the third quarter of 2010, together with lower sales in Specialty Pharmaceuticals. First-quarter sales of Contrast Products were slightly above those of a year ago, chiefly due to growth outside the U.S. Sales of Active Pharmaceutical Ingredients in the quarter were below the year-before level, in part the result of decreased acetaminophen sales. In Specialty Pharmaceuticals, generic sales fell as greater competitive activity drove pricing lower than a year ago. On a sequential basis, however, generic pricing has stabilized over the last two quarters. In branded pharmaceuticals, good 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 about even with those of the prior year, as higher generator sales countered lower sales of thallium and other products.

Medical Supplies first-quarter sales of $422 million were 5% below the $443 million reported in the comparable quarter of the previous year, principally due to lower sales of SharpSafety and Nursing Care products. A significant portion of the first-quarter 2011 sales decline was due to difficult comparisons with last year's volume and distributor inventory stocking related to the H1N1 flu.

In the first quarter of 2011, Covidien purchased approximately 2.3 million ordinary shares under its previously announced share buyback program.

FISCAL 2011 OUTLOOK

Covidien has updated its fiscal 2011 tax rate guidance. The Company currently estimates that the effective tax rate will be at or below the first-quarter adjusted rate of 18.4%, including foreign exchange at current rates and excluding the impact of one-time items. Additional tax planning activities, if implemented, could potentially reduce the rate further in 2011. There is no change to the Company's fiscal 2011 net sales, operating margin or free cash flow guidance.