Covidien earnings slip on charges, despite strong sales for Q2

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Covidien has reported a decline in net income for the second quarter of fiscal 2009, which ended March 27, due in part to lower than expected results in its imaging sector and tax charges related to its split from Tyco International.

The company said that its net income fell to $184 million in the second of 2009, compared with net earnings of $263 million in the previous year-ago quarter. During the quarter, Covidien said it implemented tax planning strategies to offset the loss of tax synergies resulting from the separation from Tyco. The second quarter effective tax rate of 65.2 percent included a one-time charge of approximately $155 million for withholding tax on repatriated earnings related to the implementation of tax planning strategies and the impact of the $183 million charge for shareholder settlements, for which no tax benefit was realized.

Second quarter net sales rose 11 pecent to $2.7 billion from $2.4 billion a year ago, with unfavorable foreign exchange of $145 million reducing the quarterly sales growth rate by approximately 6 percentage points, according to the Dublin, Ireland-based company. Excluding Oxy ER, operational growth (net sales growth excluding the effect of foreign exchange), was 7 percent. This operational sales growth was driven primarily by higher volume and new products.

Selling, general and administrative expenses for the second quarter of fiscal 2009 were below those of the year-ago second quarter, as planned increases in selling and marketing were more than offset by benefits from favorable foreign exchange. However, the company reported that its research and development expense in the quarter climbed 31 percent from that of the prior year, representing 4 percent of net sales excluding Oxy ER.

In the second quarter of 2009, Covidien booked an operating income of $527 million, versus $405 million in the same period the year before.

"Results in the imaging segment were again below our expectations. We are addressing this situation and developing plans to improve profitability in this business over time," said Richard J. Meelia, chairman, president and CEO.

Imaging solutions 2009 second-quarter sales declined 9 percent to $276 million from $304 million a year ago, according to the company. Unfavorable foreign exchange accounted for approximately 5 percentage points of the decrease. Radiopharmaceuticals sales in the quarter were well below those of the year before, chiefly due to continued molybdenum supply constraints. The company said its second quarter sales of contrast products also were well below year-ago levels, reflecting lower volume, strong competitive activity and continued pricing pressures in the United States. In addition, sales of capital equipment to hospitals, including urology tables and power injectors, were below a year ago.

"Despite the global economic slowdown, we delivered solid operational performance in the second quarter," said Meelia. "Our results were driven by new products and market share gains, aided by double-digit increases in several key product lines. This performance more than offset unfavorable foreign exchange, resulting in strong growth in our quarterly operating earnings. As planned, we concluded Oxy ER sales in the quarter and we were pleased that sales were significantly above our original projections."