Covidien Reports First-Quarter 2008 Results
Covidien Ltd. (NYSE: COV; BSX: COV) today reported results for the
first quarter of fiscal 2008 (October - December 2007) and announced
strategic changes, which resulted in the reclassification of prior
periods to account for businesses reported as discontinued operations.
First-quarter net sales rose 9% to $2.3 billion from $2.1 billion
a year ago, fueled by strong growth in the Medical Devices and Imaging
Solutions business segments. Sales growth was driven by higher volume
and new products. Favorable foreign exchange contributed 5 percentage
points to the sales increase. International markets, paced by Europe,
Other Americas and Asia-Pacific, generated double-digit sales gains.
First-quarter gross margin of 53.5% was up 1.1 percentage points
from that of the prior year. This substantial improvement reflected
favorable foreign exchange, coupled with higher margin on new
products, favorable mix in our established business and cost savings
from manufacturing, which more than offset increased costs for raw
materials and transportation.
Selling, general and administrative expenses were significantly
higher than in the first quarter of last year. The increase was
attributable to planned growth in selling and marketing investments,
foreign exchange and higher administrative costs, including legal
expenses. Research and Development (R&D) expense in the quarter rose
sharply from that of a year ago and represented 3.4% of sales, versus
2.8% of sales last year.
For the first quarter, the Company reported operating income of
$455 million versus $476 million a year ago. Excluding restructuring
and in-process R&D charges, adjusted operating income was $472 million
in the first quarter of 2008 versus $500 million in the prior year.
First-quarter 2008 adjusted operating income represented 20.4% of
sales versus 23.5% of sales in the first quarter of 2007.
Covidien recorded $180 million in Other income in accordance with
the Tax Sharing Agreement with Tyco International and Tyco
Electronics. The income primarily reflects the increase in amounts due
from related parties under the Tax Sharing Agreement resulting from
the adoption of FIN 48.
The first-quarter effective tax rate was 24.2%. Excluding the
specified items shown in the attached table, the first-quarter tax
rate was 31.9%.
First-quarter diluted GAAP earnings per share from continuing
operations were $0.89 versus $0.67 in the first quarter last year.
First-quarter 2008 included the following items: an increase of $0.34
from the Tax Sharing Agreement and decreases of $0.02 for in-process
R&D charges, $0.01 for restructuring charges and $0.01 for other tax
matters that affected the effective tax rate. Excluding these items,
diluted earnings per share from continuing operations were $0.59.
"We are off to a solid start in fiscal 2008," said President and
Chief Executive Officer Richard J. Meelia. "The first-quarter
performance is a clear indication that our new strategy is delivering
positive operational results. We are very pleased with the strong
top-line growth, especially the outstanding gains reported in our
International businesses, which reflect the incremental investments we
made in recent years to augment the sales force and expand
geographically.
"We continue to make the investments that will propel our business
growth throughout 2008, including our strong, ongoing commitment to
increasing our R&D spending to competitive levels. We´re also making a
number of portfolio management moves that are in line with our
strategy to focus our business on core healthcare categories," Mr.
Meelia said.
Results by business segment, along with a description of portfolio
management activities, follow.
Medical Devices sales climbed 11% in the first quarter to $1.6
billion from $1.4 billion in the first quarter of the previous year.
Sales growth was driven by favorable foreign exchange, which
contributed 6 percentage points to the increase, as well as by new
products and higher volume. Sales of Endomechanical were well above
those of a year ago, paced by Europe and Asia-Pacific, where sales
force expansion contributed to the advance. Energy registered strong
double-digit growth in the quarter, due to higher sales of vessel
sealing and hardware products. Sales of Vascular and Clinical Care
both registered double-digit quarterly gains. In the Respiratory
category, both Airway & Ventilation and Oximetry & Monitoring sales
rose in the quarter, though growth was restrained by increased
competitive activity.
Imaging Solutions sales rose 14% to $291 million, compared with
$256 million in the prior year´s first quarter. Favorable foreign
exchange contributed 4 percentage points to the sales increase. Sales
growth was broad-based, as both Radiopharmaceuticals and Contrast
Products grew at a double-digit pace in the quarter. The
Radiopharmaceutical increase was primarily due to higher technetium
generator sales, while Contrast Products benefited from higher sales
in Asia-Pacific and Latin America, as well as from the launch of
Optimark in Europe late in the quarter.
Pharmaceutical Products sales decreased 2% to $221 million from
$225 million in the first quarter of last year. A good increase for
Dosage Pharmaceuticals, led by higher sales of both branded and
generic products, was more than offset by lower sales of Active
Pharmaceutical Ingredients (API). The API decline reflected lower
sales of narcotic products.
Medical Supplies sales fell 2% to $217 million from $221 million
in the first quarter of the previous year due to lower sales of
Original Equipment Manufacturer (OEM) products, including needles and
pre-filled syringes, and a decline in traditional wound care sales.
The first-quarter results reflect the classification of the Retail
Products segment, as well as the Specialty Chemicals and European
Incontinence businesses, as discontinued operations. A definitive
agreement to sell the Retail Products business for $335 million was
announced in mid-December 2007.
Covidien approved a plan to sell the Specialty Chemicals business,
headquartered in Phillipsburg, New Jersey. In fiscal 2007, sales of
Specialty Chemicals were $422 million and were included in Covidien´s
Pharmaceutical Products segment.
The Company also has approved a plan to sell the European
Incontinence business, headquartered in Lille, France. This business,
formerly part of Covidien´s Medical Supplies segment, had sales of
$109 million in fiscal 2007.
Mr. Meelia said, "Following a thorough review and evaluation of
these businesses, we determined that their unique characteristics did
not support Covidien´s goal to become the leading global healthcare
products company. Our decision to discontinue these businesses is
consistent with our strategy to focus the portfolio and reallocate
resources to core healthcare businesses."
Separately, as part of the Company´s effort to globalize segment
reporting, all global sales of Radiopharmaceuticals and Contrast
Products are now reported in the Imaging Solutions segment. As a
result, net sales and operating income for the Medical Devices and
Imaging Solutions segments will be revised for all prior periods. This
revision reflects the realignment of the Imaging Solutions business
outside the U.S. and Europe, previously reported in the Medical
Devices segment, into the Imaging Solutions segment. This revision has
no impact on the total Company results of operations, financial
condition or cash flows.
Revised financial information for 2007, reflecting the change in
Imaging Solutions reporting and excluding those businesses now
reported as discontinued operations, is now available on our website
at http://investor.covidien.com.
FISCAL 2008 OUTLOOK
The Company has updated its fiscal 2008 guidance. This update
reflects the stronger than expected first quarter performance, as well
as the reclassification of the Retail Products segment, the Specialty
Chemicals and European Incontinence businesses to discontinued
operations, and the realignment of sales between the Medical Devices
and Imaging Solutions segments.
The Company now estimates sales growth for the 2008 fiscal year
will be in the 6% - 9% range, including foreign exchange at current
rates. Net sales are expected to grow 7% - 10% versus 2007 in the
Medical Devices segment, 8% - 11% in Imaging Solutions and 3% - 6% in
Pharmaceutical Products. The Company expects sales in Medical Supplies
to be about even with 2007. Excluding the impact of one-time items,
the operating margin is now expected to be in the 20% - 21% range and
we anticipate the effective tax rate will be in the 31% - 33% range
for fiscal 2008.
ABOUT COVIDIEN LTD.
Covidien is a leading global healthcare products company that
creates innovative medical solutions for better patient outcomes and
delivers value through clinical leadership and excellence. Covidien
manufactures, distributes and services a diverse range of
industry-leading product lines in four segments: Medical Devices,
Imaging Solutions, Pharmaceutical Products and Medical Supplies. With
2007 revenue of nearly $9 billion, Covidien has more than 43,000
employees worldwide in 57 countries, and its products are sold in over
130 countries. Please visit www.covidien.com to learn more about our
business.
CONFERENCE CALL AND WEBCAST
The Company will hold a conference call for investors today,
beginning at 8:30 a.m. ET. This call can be accessed three ways:
-- Web - Go to Covidien´s website at www.covidien.com. A replay
of the call will be available through February 14 at the same
website.
-- Telephone - The dial-in number for participants in the United
States is (866)-713-8310. For participants outside the United
States, the dial-in number is (617)-597-5308. The access code
for both numbers is 96941212.
-- Audio replay - The conference call will be available for
replay, beginning at noon ET on February 7, 2008, and ending
at 11:59 p.m. on February 14, 2008. The dial-in number for
participants in the United States is (888)-286-8010. For
participants outside the United States, the replay dial-in
number is (617)-801-6888. The replay access code for all
callers is 98144838.
NON-GAAP FINANCIAL MEASURES
This press release contains financial measures, including adjusted
operating income, adjusted earnings per share and adjusted operating
margin, that are considered "non-GAAP" financial measures under
applicable Securities & Exchange Commission rules and regulations.
These non-GAAP financial measures should be considered supplemental to
and not a substitute for financial information prepared in accordance
with generally accepted accounting principles. The Company´s
definition of these non-GAAP measures may differ from similarly titled
measures used by others.
The non-GAAP financial measures used in this press release adjust
for specified items that can be highly variable or difficult to
predict. The Company generally uses these non-GAAP financial measures
to facilitate management´s financial and operational decision-making,
including evaluation of Covidien´s historical operating results,
comparison to competitors´ operating results and determination of
management incentive compensation. These non-GAAP financial measures
reflect an additional way of viewing aspects of the Company´s
operations that, when viewed with GAAP results and the reconciliations
to corresponding GAAP financial measures, may provide a more complete
understanding of factors and trends affecting Covidien´s business.
Because non-GAAP financial measures exclude the effect of items
that will increase or decrease the Company´s reported results of
operations, management strongly encourages investors to review the
Company´s consolidated financial statements and publicly filed reports
in their entirety. A reconciliation of the non-GAAP financial measures
to the most directly comparable GAAP financial measures is included in
the tables accompanying this release.
The Company presents its operating margin forecast before special
items to give investors a perspective on the expected underlying
business results. Because the Company cannot predict the amount and
timing of such items and the associated charges or gains that will be
recorded in the Company´s financial statements, it is difficult to
include the impact of those items in the forecast.
FORWARD-LOOKING STATEMENTS
Any statements contained in this press release that do not
describe historical facts may constitute forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act
of 1995. Any forward-looking statements contained herein are based on
our management´s current beliefs and expectations, but are subject to
a number of risks, uncertainties and changes in circumstances, which
may cause actual results or Company actions to differ materially from
what is expressed or implied by these statements. The factors that
could cause actual future results to differ materially from current
expectations include, but are not limited to, risks and uncertainties
relating to satisfaction of closing conditions related to the Retail
Products business transaction, the integration of businesses we have
acquired or may acquire in the future, changing technologies, product
development and market acceptance of our products, the cost and
pricing of our products, manufacturing, competition, customers´
capital spending and government funding policies, changes in
governmental regulations, the use and protection of intellectual
property rights, litigation and exposure to foreign currency
fluctuations. These and other factors are identified and described in
more detail in our filings with the SEC. We disclaim any obligation to
update these forward-looking statements other than as required by law.
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Covidien Ltd.
Consolidated and Combined Statements of Income
Quarters Ended December 28, 2007 and December 29, 2006
(dollars in millions, except per share data)
Quarter Quarter
Ended Percent Ended Percent
December of Net December of Net
28, 2007 Sales 29, 2006 Sales
----------------- -----------------
Net sales $ 2,316 100.0% $ 2,128 100.0%
Cost of products sold 1,077 46.5 1,012 47.6
--------- ---------
Gross profit 1,239 53.5 1,116 52.4
Selling, general and
administrative expenses 689 29.7 556 26.1
Research and development expenses 78 3.4 60 2.8
In-process research and
development charges 12 0.5 8 0.4
Restructuring charges 5 0.2 16 0.8
--------- ---------
Operating income 455 19.6 476 22.4
Interest expense 60 2.6 40 1.9
Interest income (12) (0.5) (9) (0.4)
Other income (180) (7.8) -- --
--------- ---------
Income from continuing
operations before income
taxes 587 25.3 445 20.9
Income taxes 142 6.1 113 5.3
--------- ---------
Income from continuing
operations 445 19.2 332 15.6
Loss (income) from discontinued
operations, net of income taxes 25 1.1 (6) (0.3)
--------- ---------
Net income $ 420 18.1 $ 338 15.9
========= =========
Basic earnings per share:
Income from continuing
operations $ 0.89 $ 0.67
Loss (income) from discontinued
operations 0.05 (0.01)
Net income 0.84 0.68
Diluted earnings per share:
Income from continuing
operations $ 0.89 $ 0.67
Loss (income) from discontinued
operations 0.05 (0.01)
Net income 0.84 0.68
Weighted-average number of shares
outstanding: (1)
Basic 498 497
Diluted 502 497
(1) For the quarter ended December 29, 2006, the common shares
outstanding immediately following the Separation were used to
calculate basic and diluted earnings per share because no common
shares, share options or restricted shares of Covidien were
outstanding on or before June 29, 2007.
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Covidien Ltd.
Non-GAAP Reconciliations
Quarters Ended December 28, 2007 and December 29, 2006
(dollars in millions, except per share data)
Quarter Ended December 28, 2007
----------------------------------------------
Income from Diluted
continuing earnings
operations per share
before Income from from
Operating income continuing continuing
income taxes operations operations
---------- ----------- ----------- -----------
GAAP $ 455 $ 587 $ 445 $ 0.89
Adjustments:
In-process research
and development
charge (1) 12 12 12 0.02
Restructuring charges
(2) 5 5 3 0.01
Impact of tax sharing
agreement (3) -- (172) (172) (0.34)
Tax matters -- -- 6 0.01
---------- ----------- -----------
As adjusted $ 472 $ 432 $ 294 0.59
========== =========== ===========
-----------------------
(1) Our Medical Devices segment recorded an in-process research and
development charge of $12 million in connection with the acquisition
of Scandius Biomedical Inc.
(2) Restructuring charges of $5 million related primarily to severance
costs within our Medical Devices segment.
(3) Other income includes $172 million related to the impact of our
tax sharing agreement with Tyco International and Tyco Electronics
primarily resulting from the adoption of FIN 48.
Quarter Ended December 29, 2006
----------------------------------------------
Income from Diluted
continuing earnings
operations per share
before Income from from
Operating income continuing continuing
income taxes operations operations
---------- ----------- ----------- -----------
GAAP $ 476 $ 445 $ 332 $ 0.67
Adjustments:
In-process research
and development
charge (1) 8 8 8 0.02
Restructuring charges
(2) 16 16 10 0.02
Tax matters -- -- (5) (0.01)
---------- ----------- -----------
As adjusted $ 500 $ 469 $ 345 0.69
========== =========== ===========
-----------------------
(1) Our Medical Devices segment recorded an in-process research and
development charge of $8 million in connection with the acquisition
of Airox S.A.
(2) Restructuring charges of $16 million related primarily to
severance costs within our Medical Devices segment.
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Covidien Ltd.
Segment and Geographical Sales
Quarters Ended December 28, 2007 and December 29, 2006
(dollars in millions)
Quarters Ended
-----------------
December December Percent
28, 29, Percent change Operational
2007 2006 change currency growth
-------- -------- ------- --------- -----------
Medical Devices (1)
United States $ 687 $ 655 5% --% 5%
Non-U.S. 900 771 17 11 6
-------- --------
$ 1,587 $ 1,426 11 6 5
Imaging Solutions (1)
United States $ 179 $ 165 8% --% 8%
Non-U.S. 112 91 23 10 13
-------- --------
$ 291 $ 256 14 4 10
Pharmaceutical
Products (1)
United States $ 197 $ 208 (5)% --% (5)%
Non-U.S. 24 17 41 12 29
-------- --------
$ 221 $ 225 (2) 1 (3)
Medical Supplies (1)
United States $ 217 $ 221 (2)% --% (2)%
Non-U.S. -- -- -- -- --
-------- --------
$ 217 $ 221 (2) -- (2)
Covidien Ltd. (1)
United States $ 1,280 $ 1,249 2% --% 2%
Non-U.S. 1,036 879 18 11 7
-------- --------
$ 2,316 $ 2,128 9 5 4
----------------------
(1) Sales to external customers are reflected in the regions based on
the location of the sales force executing the transaction.
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Covidien Ltd.
Select Product Line Sales
Quarters Ended December 28, 2007 and December 29, 2006
(dollars in millions)
Quarters Ended
-----------------
December December Percent
28, 29, Percent change Operational
2007 2006 change currency growth
-------- -------- ------- --------- -----------
Medical Devices
Endomechanical (1) $ 500 $ 442 13% 6% 7%
Soft Tissue Repair
(2) 129 118 9 7 2
Energy (3) 185 148 25 6 19
Oximetry and
Monitoring (4) 152 143 6 3 3
Airway and
Ventilation (5) 185 176 5 6 (1)
Vascular (6) 129 117 10 4 6
SharpSafety (7) 113 112 1 2 (1)
Clinical Care (8) 99 90 10 6 4
Imaging Solutions
Radiopharmaceuticals
(9) $ 135 $ 118 14% 3% 11%
Contrast (10) 156 138 13 4 9
----------------------
(1) Endomechanical includes our laparoscopic instruments and surgical
staplers.
(2) Soft Tissue Repair includes our suture products, mesh products and
biosurgery products.
(3) Energy includes our vessel sealing products, electrosurgical
products, ablation products and related capital equipment.
(4) Oximetry and Monitoring includes our sensors and monitors products
and our temperature management products.
(5) Airway and Ventilation includes our airway products, ventilator
products, breathing systems, sleep products and inhalation therapy
products.
(6) Vascular includes our compression products and vascular therapy
products.
(7) SharpSafety includes our needles and syringes products and our
sharps disposable products.
(8) Clinical Care includes our urology products, enteral feeding
products and other advanced woundcare products.
(9) Radiopharmaceuticals includes our radioactive isotopes and
associated pharmaceutical products used for the diagnosis and
treatment of disease.
(10) Contrast includes our contrast delivery systems and contrast
agents.
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