Covidien plc (NYSE: COV) today reported results for the fourth quarter of fiscal 2011 (July - September 2011). Net sales of $3.08 billion increased 15% from the $2.67 billion reported in the fourth quarter a year ago. The quarterly sales growth rate benefited from foreign exchange rate movement, which added about four percentage points, and the inclusion of an extra selling week in the fourth quarter of 2011, which added approximately seven to eight percentage points.
Fourth-quarter 2011 gross margin of 56.5% rose 1.6 percentage points from the 54.9% of the prior-year period. On an adjusted basis, excluding the specified items shown on the attached quarterly Non-GAAP reconciliation table, fourth-quarter 2011 gross margin of 56.7% was 0.5 percentage points above that of a year ago. This improvement reflected positive mix in all three business segments, benefits from our restructuring programs and favorable foreign exchange.
Selling, general and administrative (SG&A) expenses for the fourth quarter of 2011 were somewhat above those of the comparable quarter of the year before, primarily due to expenses related to prior year acquisitions and the impact of foreign exchange rate movement. Research and Development (R&D) expense in the fourth quarter climbed 33% and represented 5.4% of net sales, versus 4.7% of sales in the year-ago period.
In the fourth quarter of 2011, the Company reported operating income of $596 million, versus $443 million in the same quarter the year before. Fourth-quarter 2011 adjusted operating income, excluding the specified items, was $685 million, compared with $547 million in the previous year. Fourth-quarter 2011 adjusted operating income, excluding the specified items, represented 22.3% of sales, versus 20.5% in the year-ago period.
The fourth-quarter 2011 effective tax rate was 19.7%, versus a tax benefit in the fourth quarter of 2010. The fourth-quarter 2011 adjusted tax rate, excluding specified items, was 18.2%, versus 15.3% in the fourth quarter a year ago.
Diluted GAAP earnings per share from continuing operations were $0.93 in the fourth quarter of 2011, versus $0.77 per share in the comparable quarter last year. Fourth-quarter 2011 adjusted diluted earnings per share, excluding specified items, were $1.08, versus $0.84 a year ago, a 29% increase.
For fiscal 2011, net sales of $11.57 billion were 11% above the $10.43 billion in the previous year, with favorable foreign exchange increasing the sales growth rate by approximately three percentage points. The addition of an extra selling week in fiscal 2011 also added approximately two percentage points to the sales growth rate.
The Company reported operating income of $2.38 billion in fiscal 2011, versus $2.06 billion a year earlier. Fiscal 2011 adjusted operating income, excluding the specified items shown on the attached Non-GAAP reconciliation table, was $2.57 billion, versus $2.26 billion in the previous year. Fiscal 2011 adjusted operating income, excluding specified items, represented 22.2% of sales, versus 21.7% a year ago.
The effective tax rate was 15.0% for fiscal 2011, versus an effective tax rate of 18.8% in fiscal 2010. Excluding the specified items, the adjusted tax rate for fiscal 2011 was 18.3%, versus 19.5% in fiscal 2010.
For fiscal 2011, diluted GAAP earnings per share from continuing operations were $3.79, versus $3.10 for fiscal 2010. Excluding the specified items, adjusted diluted earnings per share from continuing operations were $3.97, versus $3.38 the year before, a 17% gain.
"We delivered strong fourth-quarter and fiscal 2011 results," said José E. Almeida, President and CEO. "This performance was aided by successful new product launches, market share gains in several key categories and exceptional commercial execution. We significantly increased R&D spending, made other important growth-driving investments and again generated strong cash flow.
"Looking to 2012, we remain comfortable with the sales and operating margin guidance we issued in September," Mr. Almeida said. "Although the market environment continues to be challenging, our expectations for the operational growth of our business have not changed. We are confident that our robust new products pipeline, skilled workforce and strategic investments in emerging markets will drive positive operational results in 2012 and beyond."
BUSINESS SEGMENT RESULTS
Medical Devices sales of $2.09 billion in the fourth quarter rose 18% from the $1.77 billion in the comparable quarter of last year. Operational growth was 12%, driven by acquisitions, new products and greater volume. Operationally, fourth-quarter sales in Endomechanical were above those of the prior year, paced by a good increase for stapling products, led by our innovative Tri-Staple™ reloads. In Soft Tissue Repair, sales growth slowed, as higher sales of sutures were partially offset by a decline for mesh, fixation and biosurgery products. The Energy double-digit quarterly sales gain was again due to a sharp rise in sales of vessel sealing products, coupled with a good performance for electrosurgery. In Oximetry & Monitoring, monitor sales registered a very strong advance, and sensor sales were well above those of a year ago. In Airway & Ventilation, operational sales were virtually unchanged, as higher sales of airway products were countered by lower ventilator sales. Vascular sales climbed at a strong double-digit pace, reflecting new products, a full quarter of neurovascular and peripheral vascular products and, to a lesser extent, double-digit growth for venous insufficiency products.
For fiscal 2011, Medical Devices sales rose 17% to $7.83 billion from $6.72 billion in the prior year. Favorable foreign exchange contributed approximately four percentage points to the increase.
Pharmaceuticals sales of $507 million in the fourth quarter were up 9% from last year's fourth-quarter sales of $465 million. Foreign exchange rate movement added approximately three percentage points to the fourth-quarter sales change. The increase was fueled by exceptional gains for Specialty Pharmaceuticals, as generic sales climbed at a strong double-digit pace, reflecting the launch of the fentanyl patch, growth for fentanyl lozenge and a continuation of the stabilization in generic pricing seen over the last several quarters. In addition, branded products, including PENNSAID® and EXALGO®, posted sales that were well above those of the year-ago period. Sales of Radiopharmaceuticals were ahead of those of the prior year, as higher generator sales more than countered lower sales of thallium. Sales of Active Pharmaceutical Ingredients advanced from the year-ago level, due primarily to increased sales of acetaminophen. Fourth-quarter sales of Contrast Products were well below those of the year before, largely reflecting difficult comparisons due to customer order patterns.
For fiscal 2011, Pharmaceuticals sales declined 1% to $1.97 billion from $1.99 billion a year ago. The decrease was primarily attributable to the divestiture of the U.S. nuclear pharmacies business in fiscal 2010.
Medical Supplies fourth-quarter sales of $481 million rose 11% from the $432 million reported in the comparable quarter of the previous year, spurred by higher sales of Nursing Care and Medical Surgical products. The growth in Nursing Care was led by incontinence and enteral feeding products, while the Medical Surgical gain reflected increased sales of the new Kendall™ DL disposable lead wires.
For fiscal 2011, sales of Medical Supplies, at $1.78 billion, were up 3% from last year's $1.72 billion.
In the fourth quarter of 2011, Covidien purchased approximately 11.7 million ordinary shares under its previously announced share buyback programs.
For fiscal 2011, free cash flow (net cash provided by continuing operating activities less capital expenditures) was approximately $1.7 billion.
FISCAL 2012 OUTLOOK
Covidien has updated its fiscal 2012 tax rate guidance. The Company now expects that the effective tax rate for 2012 will be in the 17% to 18% range, including foreign exchange at current rates and excluding the impact of one-time items. There are no other changes to Covidien's previously issued 2012 guidance, which follows. Sales in fiscal 2012 are expected to be up 3% to 5%, including foreign exchange at current rates. Net sales are expected to be up 4% to 7% versus 2011 in the Medical Devices segment and up 2% to up 5% in Pharmaceuticals. For the Medical Supplies segment, sales are expected to be about flat. Including foreign exchange at current rates and excluding the impact of one-time items, the operating margin is expected to be in the 22% to 23% range and free cash flow is expected to exceed $1.9 billion.
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