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Covidien Ltd. (NYSE:COV)

F4Q07 Earnings Call

December 6, 2007, 8:30 AM ET

Executives

Coleman N. Lannum - VP of IR

Richard J. Meelia - President and CEO

Charles J. Dockendorff - EVP and CFO

Jose E. Almeida - President, Medical Devices

Analysts

Glenn Reicin - Morgan Stanley

Robert Hopkins - Lehman Brothers

Kristen Stewart - Credit Suisse

Tao Levy - Deutsche Bank

Joanne Wuensch - BMO Capital Markets

Presentation

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Covidien Earnings Conference Call. My name is Carol and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Cole Lannum, Vice President of Investor Relations. Please proceed sir.

Coleman N. Lannum - Vice President of Investor Relations

Thanks Carol and good morning everyone. With me today are Rich Meelia, Covidien's President and Chief Executive Officer; Chuck Dockendorff, our Chief Financial Officer; and Joe Almeida, President of our Medical Devices Segment. You should already have received a copy of our press release with details of our fourth quarter full year 2007 results. If not, it's available on our website and the Newswires.

During today's call, we'll make some forward-looking statements, and it's possible that actual results could differ from our current expectations. Please refer to the cautionary statements contained in our SEC filings for a more detailed explanation of the inherent limitations in such forward-looking statements. We'll also discuss some non-GAAP financial measures with respect to our performance. A reconciliation of non-GAAP to GAAP measures can be found in our press release and its related financial tables as well as on our website covidien.com.

Now in the release, you will see some changes in the way we're reporting our sales below segment level. We have included a new table with selected product categories which we hope will help you better understand the components of revenue growth. We have also provided details on U.S. versus non-U.S. sales by segment. This higher degree of granularity should provide you with a more in-depth understanding of the dynamics of the company, and we can talk about that a little more in Q&A.

Fourth quarter Covidien GAAP earnings per share were $0.07. After adjusting for several items that are summarized in the non-GAAP table included in the press release, non-GAAP earnings were $0.63 per share. For the year, on a GAAP basis, we reported a loss of $0.58 per share from continuing operations. Non-GAAP earnings per share from continuing operations after adjustment were $2.72.

Now I'll turn it over to Rich who will give a brief overview before Chuck gets into the numbers. Rich?

Richard J. Meelia - President and Chief Executive Officer

Thanks Cole. I would like to start by giving you my perspective on our transformation to date as a standalone company. As we approached the separation from Tyco International, we knew there were three major areas that needed to be addressed in order for us to be successful as a leading global healthcare products company, and for us to begin to establish credibility with the financial community.

The first was that we needed to deliver solid performance in 2007 to show that the problems we experienced in 2006 were over. As you may recall, our results last year were hurt substantially by quality issues in manufacturing that resulted in poor service levels and product recalls.

The second focus area was to develop a new winning strategy for Covidien as an independent company, a strategy completely different from what we had followed as a division of Tyco.

And third, we needed to begin to execute against this new strategy by delivering some measurable accomplishments as we finished the 2007 fiscal year as a standalone company.

I am very pleased to tell you that we made good progress in all three areas. In 2007, we addressed our manufacturing and service issues. We markedly improved our quality processes and have had a good track record on FDA inspections. These efforts will serve as the foundation for a stronger, more competitive company going forward.

In our second focus area, we successfully developed and communicated a comprehensive new strategy centered on growth, innovation and globalization. The key to executing the strategy is to continue increasing our investment in R&D and to fully develop our growth functions, portfolio management, strategic marketing, business development and licensing. In addition, we have begun to launch targeted growth initiatives to accelerate our future performance and more fully leverage our global footprint as we roll out these new products.

And finally, we have made significant strides in 2007. We successfully accelerated our sales growth rate with a 5% increase in 2007 versus just a 1% increase in 2006. We also improved our gross margin by 110 basis points despite an increase in raw material costs.

We also believe that we are making investments in the right areas. The initial investments we have made in our growth driving areas began to generate some positive results in our largest business segment, Medical Devices. This segment has received most of our incremental investment in recent years, and as Joe will discuss in few minutes, it's clearly paying off. At the same time, we continue to work on optimizing our portfolio. We make significant progress reviewing our businesses, and we will make the portfolio decisions that allow us to focus on our strategic franchises and create value for our shareholders. When we are able to communicate these decisions to you, we will do so.

As I look to 2008, I am more confident than ever that we will be successful in implementing the significant changes we have envisioned for the organization. These changes will result in a company that will be more aggressive, more innovative and most important, more competitive than we have been in the past.

I'll now pass the call over to Chuck who will discuss the quarterly and annual results in more detail.

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Thanks Rich. Overall we're pleased with the fourth quarter results. Sales grew 5% to $2.6 billion led by the Medical Devices and Imaging Solutions segments. Favorable foreign currency contributed 2 percentage points to our sales growth rate. Sales rose 1% in the United States and 12% outside the U.S. Sales in the U.S were restrained by a sharp decline for Retail Products which I will discuss shortly.

Looking now at the segment results, Joe Almeida will provide more detail on our largest segment, Medical Devices, following my presentation. I will begin with the Pharmaceutical Products segment.

As expected, sales growth moderated this quarter as we registered a 4% increase to $327 million. Higher sales of Active Pharmaceutical Ingredients and Specialty Chemicals more than offset a small decline in dosage products, largely due to timing of new products. Sales growth was paced by narcotics and bulk acetaminophen as well as higher sales of pharmaceutical chemicals in Europe and laboratory chemicals in the U.S.

In the Imaging Solutions segment, sales were up 11% in the quarter to $252 million, aided by favorable foreign exchange rates which contributed 2 percentage points to the increase. The double-digit growth in the quarter was paced by a very strong performance for Radiopharmaceuticals which climbed 18%.

Contrast sales were up 4% in the quarter. As we have noted previously, we continue to see pricing pressure in the contrast media business which restrained our results in this segment.

Turning to Medical Supplies, sales of $250 million were slightly below a year ago. Higher sales of nursing care products were more than offset by lower OEM sales, largely needles and syringes.

In Retail Products, sales of $164 million came in below expectations. Sales were 23% below last year's fourth quarter due chiefly to our previously discussed withdrawal from several low-margin contracts and price pressure from branded competitors and large retailers.

Turning to the items below the sales line, we again made good progress on gross margin with a 200-basis point gain in the quarter. This is the fourth consecutive quarter of improved gross margin. The increase came as favorable product mix, efficiencies in our factories and benefits from foreign exchange more than accounted higher raw-material costs, primarily oil-based products and pulp.

The improvements in gross profit were more than offset by higher SG&A and R&D expenses. We continue to accelerate spending in these two areas to increase long-term revenue growth through more competitive marketing and innovation as well as sales force expansion. We executed our planned increases in selling and marketing personnel, as well as headcount additions in our business development and portfolio management functions.

We also faced higher administrative expenses, including compensation expense, costs to operate as a standalone public company, and expenses related to the separation from Tyco.

Similar to last quarter, we had some separation-related expense that will not be permanent. We do not call all these expenses one-times... one-time items but we believe that they should be largely behind us by the end of the first quarter of 2008.

R&D spending climbed 13% in the quarter to 3% of sales. As we have previously noted, growth in 2007 was restrained by the relocation of respiratory research facility. We've remained committed to increasing R&D spending. Consistent with our prior guidance, we plan for R&D spending to be in the range of 4% to 5% of sales within a few years.

As you can see from the release, we also had several special items that affected our reported results. We announced two asset impairments that are reflected in the quarter. In Retail Products, we recorded a $256 million non-cash charge for goodwill impairment due to continued adverse trends in raw materials and higher energy costs and a higher discount rate to reflect the current market conditions.

In the Imaging Solutions segment, we recorded a $33 million non-cash charge as a shift in branding strategy will result in our discontinuing use of a trademark. The quarter also included a $32 million restructuring charge related to the program we announced about one year ago. To date, we have spent $58 million and expect to spend about $150 million in the total program. Most of this spending will be completed by the end of calendar 2008. Once completed, this program is expected to deliver between $50 million and $75 million in annualized savings.

Finally, we booked an additional $5 million insurance recovery for the charge we reported last quarter for our portion of the Tyco International shareholder class action settlement.

As reported, operating income was $156 million. Excluding the specified items just mentioned, the asset impairments, the restructuring charge, and the class action recovery, operating income would have been $473 million and the operating margin would have been 18.2%.

While the quarterly operating margin was significantly below the 20% to 21% range that we gave for the full year, it reflects the discretionary acceleration of gross spending which we believe will ultimately be accretive to profitability.

Looking below the operating income, net interest expense was on target at $55 million. As you may know, we refinanced $2.75 billion of debt after the quarter ended, replacing a portion of our borrowings under an unsecured bridge loan with fixed rate notes. Given the recent turmoil in the credit markets, we are pleased to have that behind us.

Turning to income taxes, the fourth quarter effective rate was 71%. This rate reflected the goodwill impairment charge only a portion of which was tax deductible, and other adjustments to legacy income tax liabilities. Excluding specified items, the fourth quarter tax rate was 27%.

As Cole noted, GAAP earnings per share were reported as $0.07. Excluding the specified items noted in the release, fourth quarter EPS was $0.63.

Now, let me take you through some of the cash flow highlights. For the quarter, free cash flow which we define as operating cash flow minus capital expenditures should be approximately $430 million, up from $411 million last year. For 2008 and beyond, we expect that our business operations will continue to generate strong cash flow.

Finally, I would like to discuss our guidance for fiscal 2008. Consistent with our prior guidance, we expect sales to increase 3% to 5% in 2008, excluding the impact of foreign exchange. Including foreign exchange at current rates, we are expecting a 4% to 6% sales increase for the year. Obviously, our reported sales guidance may change during the year depending on exchange rate fluctuations or operational items.

While these ranges reflect our estimates for the full year, we expect higher sales growth in the second half of the year versus the first half. This is due to the current weakness we are experiencing in certain businesses, coupled with the expectation that the contributions from growth initiatives and sales and marketing investments will drive accelerated sales as we move through the year.

In addition to reiterating our prior sales guidance, we are initiating specific guidance ranges for our segments. These ranges are also based on current exchange rates.

In Medical Devices, we expect sales to be up 6% to 8%. We expect that the Endomechanical, Energy, and Soft Tissue Repair businesses will again drive our growth in 2008. We expect our Pharmaceutical Products segment to go up 3% to 6% for the year. We have several new products awaiting approval at the FDA, and depending on timing and launch of these products, the growth rate would move to the high end of the range or beyond later in the year.

In Imaging Solutions, we expect sales to be up 7% to 10%. We have recently announced the price increase for Technetium Generators that will take effect in the second quarter of the year. This price increase should it be a modest positive to sales in 2008. We expect our Medical Supplies business to be flat to slightly down for the year. And in Retail Products, we expect sales to be flat to down 5% versus 2007.

As noted earlier, we are currently seeing significant sales erosion due primarily to the exit of unprofitable [indiscernible]. Our announced price increase will go into effect in the fiscal second quarter, and we believe this increase along with easier comparisons later in the year should result in better sales growth in the second half of 2008.

Our operating income margin, excluding any in-process research and development and restructuring charges, is expected to be in the 19% to 20% range. This margin estimate is for the total year. So of course any individual quarter might be above or below the range. The operating margin reflects further progress in gross margin improvement offset by increases in R&D and SG&A expense as we continue to make incremental investments in selling and marketing.

As with the overall sales guidance, the operating margin guidance is consistent with our prior comments. The effective tax rate should be 30% to 32% tending toward the higher end of the range, excluding the impact of any legacy liabilities from Tyco or one-time tax items. Over the next several years, we expect to implement tax planning strategies to reduce our effective tax rate by at least 200 to 300 basis points.

Looking at shares outstanding, you should expect about a 1% increase during the year. As we have noted previously, we faced difficult financial comparisons in fiscal 2008. Year-over-year net income will be affected by increased investments in selling and marketing, higher interest costs associated with our increased debt levels, and a higher tax rate.

Now, I'll turn the call over to Joe Almeida who will... for a more in-depth discussion of the Medical Devices segment results.

Jose E. Almeida - President, Medical Devices

Thanks Chuck. It's a pleasure to be here this morning to discuss the Medical Devices business. Overall, it was another excellent quarter for the Medical Devices with sales up 9%. Growth was paced by strong double-digit increases in Energy which grew 25%, and Soft Tissue Repair which increased 15%. These strong increases were coupled with good performance for Endomechanical, up 8% and for Vascular and SharpSafety, both of which increased 9%.

The excellent growth in Energy resulted from the strong increases in vessel sealing and hardware products in both the U.S. and Europe, as well as broader market penetration for the new Force Triad Generator and the related disposable products we recently launched, such as Impact, our newest vessel sealing device.

Sales growth in Soft Tissue was paced by a strong performance for mesh products in the U.S. and Europe, the addition of Polysuture in Latin America in good performance for sutures globally.

In the Endomechanical business, we registered a good performance for our Endo GIA stapling products. Growth was aided by the investments we made over the last couple of years to expand our sales force in Europe and Asia, where we are growing ahead of the market.

In our Vascular business, we delivered double-digit growth for compression products and good increases for dialysis products. The SharpSafety increase was led by growth for pre-filled syringes. In our Respiratory Product lines sales of airway and ventilation products rose 5% aided by Airox acquisition while Oximetery and Monitoring climbed 3% from a year ago, both below our overall segment growth rate. As noted previously, the respiratory business has suffered in the last few years from under funding that has affected innovation cycle and the new product flow.

During 2007, we relocated our respiratory headquarters and R&D facility to Boulder, Colorado. Over time, this move should lower operating costs, refocus the R&D process and strengthen the product development pipeline, providing a strong foundation for future growth. We have a number of meaningful new products launching in the first half of 2008. While time does not permit me to go into detail about them, here is a brief list of some of our key launches: LigaSure Advance, our first dissection vessel sealing combination device; PleuraSeal Lung Sealant, we are launching it in Europe. AbsorbaTack fixation device, a product from the acquisition of Sorbx, acquired earlier this year. The 15 millimeter Bersa Stastroker [ph], ENDO CLIP III, Clip Applier and Prolite Mesh, a preshape mesh designed specifically for women's health procedures.

While we're making good progress and growing the business internally through sales force expansion in new products, we are also looking outside for growth opportunities. Following the close of the quarter, we announced two external developments in the Medical Devices business.

First, we acquired Scandius Biomedical, which expands our presence in the $1 billion sports surgery market. Scandius currently markets two products for ACL reconstruction and has promising products in development. And second, we announced a multi-year agreement with Allergan to co-promote the LAP-BAND Adjustable Gastric Banding System to surgeons in the United States.

This is an excellent addition to our sales force, and Covidien can now offer a full suite of options for bariatric surgery. As you can see, it is an exciting time for the Medical Devices business with lots of meaningful activity and a strong momentum across our business as we move into fiscal 2008.

Now, I will turn the call over to Rich for some concluding comments.

Richard J. Meelia - President and Chief Executive Officer

Thank you, Joe. As you heard, we reported a good quarter with results largely on track with our expectations. The quarter featured acceptable top-line growth and improved gross margins, further investments in R&D, selling and marketing and another strong performance outside the United States.

Gross margin expansion helped to offset further increases in our investment initiatives, which grew at an even quicker pace than previously expected. Sales growth in a few of our businesses, however, was below my expectations, and we are addressing these areas. As planned, we are ramping up our acquisition in business development and licensing functions. In addition to the activities Joe mentioned, we recently announced two important long-term licensing agreements in our Imaging Solutions business.

The first is with BioSynthema. It includes the development and marketing of technology for the treatment of neuroendocrine cancer. The second with the University of New South Wales in Australia is for the development of an innovative imaging agent to increase the efficacy of cancer treatments. Although these are longer term opportunities, they both have excellent potential to deliver novel imaging products that strengthen our business.

As I noted last quarter, we will continue to increase our investments in R&D to accelerate the flow of new products. We launched a number of innovative products in 2007, and we fully expect to increase that number in 2008. We have a strong pipeline of opportunities across all of our businesses to accelerate top-line growth.

Looking back at 2007, all of us at Covidien are proud of the results we achieved. For 2008, we look forward to an even stronger performance across all the areas of our business.

Now we'll be happy to take any questions you might have. I'll turn the call back to Cole, who will explain the procedure for signaling if you do have a question.

Coleman N. Lannum - Vice President of Investor Relations

Thanks Rich. For Q&A, I am going to ask that you please limit yourself to one question and a follow-up if needed, then put yourself back in the queue. Carol, could you please review the process for signaling the question?

Question And Answer

Operator

Thank you sir. [Operator Instructions] And your first question comes from the line of Glenn Reicin with Morgan Stanley. Please proceed sir.

Glenn Reicin - Morgan Stanley

Good morning folks.

Richard J. Meelia - President and Chief Executive Officer

Good morning.

Glenn Reicin - Morgan Stanley

A bunch of questions but I will try to be respectful for everyone's time here. Can you maybe quantify a little bit on the SG&A line? What was due to the separation costs that are going go away in the first quarter? What's... sort of what was due to higher discretionary spend? I am just trying to understand the run rate as we move forward, the normalized run rate?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Sure Glenn, this is Chuck. As far as SG&A, the separation costs, we had approximately little over $20 million of separation costs in the quarter. We forecasted these costs actually, and it wasn't really a reason that our SG&A was up over plan. Most of the... the SG&A did come in higher than we expected. And most of this was in our Medical Devices segment. And it was a combination of accelerated investment and sales initiatives. We also had some adjustments to commission expense, and we actually are experiencing lower sales turnover in a lot of our areas which is a good thing. And we also had some increase in... we have the forward contracts on the euros and in foreign currency, and we had some mark-to-market adjustments in the quarter. So, that's pretty much what drove the increase in SG&A above our expectation.

Glenn Reicin - Morgan Stanley

So, what's the normalized rate, is it close to $700 million or $650 million per quarter?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

I would say as you know what... we're planning on next year increasing our investments in selling and marketing and we've stated that to drive the revenue growth. So we see further improvements or increases in selling and marketing as we go forward. On the G&A line piece of that, we're beginning to leverage that next year but there will be slight increases in G&A.

Glenn Reicin - Morgan Stanley

So, is it closer to $650 million or closer to $700 million?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

I would say it's closer to that upper end range as we go forward.

Glenn Reicin - Morgan Stanley

Okay. And then, two other issues. The tax rate I think you said your objective is to reduce it 200 to 300 basis points I think that's new, little bit higher than we seen in the past, what are you doing there? And then finally, what ANDAs are you actually waiting for in 2008 as it relates to those... each business?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

As far as the tax rate and their improvement we have been pretty consistent. We have said 200 to 300 basis points over the next couple of years. So we are sticking with that and we have a number of opportunities that we have identified, and we should begin to implement those in 2008 and going forward. So that's not really a change. We are consistent with our guidance on that piece of it.

Richard J. Meelia - President and Chief Executive Officer

Yes Glenn, this is Rich. As far as the ANDAs we actually don't disclose those specific ANDAs but they are all in the control substance area primarily dealing with pain relief. And so that's where they all are focused.

Glenn Reicin - Morgan Stanley

All right. How many do you have, are you waiting for 2008?

Richard J. Meelia - President and Chief Executive Officer

Well I mean we've got several in with FDA and you never know exactly where FDA is going to end up on these things. But we get... there are three to four that we expect to get approved during this coming fiscal year.

Glenn Reicin - Morgan Stanley

And do you expect to derive revenues from OxyContin in 2008? I didn't... and I am careful the way I phrase that. It doesn't necessarily mean a launch but are you going to be able to get anything out of it?

Richard J. Meelia - President and Chief Executive Officer

I mean that's one of the areas where we currently have in ANDA, and that's important area for us Glenn.

Glenn Reicin - Morgan Stanley

Okay, thank you.

Operator

And your next question comes from the line of Bob Hopkins with Lehman Brothers. Please proceed.

Robert Hopkins - Lehman Brothers

Okay. Thank you. I will try to stick to two. First, a big picture question and then a detailed question on the tax rate. Rich, I was wondering if you could talk about your M&A strategy a little bit because you have done a few smaller tuck-in acquisitions. And is that the kind of thing that we should expect going forward? Or is there potential for bigger deals as we look at 2008?

Richard J. Meelia - President and Chief Executive Officer

Yes. Sure Glenn. I mean, first of all, we don't take anything off the table because you can't predict what's going to become available. But we're very pleased with what our recent strategy has done for the business. If you look at deal such as our mesh deal with Floreane and what Confluent has helped us do in the biosurgery market. The ability to fill product line gaps to bringing technology that really enhances our presence in markets where we compete very effectively has been a very effective strategy for us. And going forward, we'll be focused on technology and growth businesses because we think that long term that is going to drive the value of the business. So, our plan is to continue to look at the kind of opportunities that we've identified. However, if the right, larger deal came available, we wouldn't just categorically exclude it because as you know, we have had a history of that demonstrative capability to do a big deal and to integrate these deals pretty effectively.

Robert Hopkins - Lehman Brothers

And how... remind me how much dilution would you be going to take in, in considering larger transactions?

Richard J. Meelia - President and Chief Executive Officer

Well we don't give a specific number but, we do recognize that most deals in this sector involve some dilution. But we look at ultimately metrics such as internal rate of return, return on the invested capital. And if they meet those hurdles, say after like a three-year period, then we feel really good about the deal.

Robert Hopkins - Lehman Brothers

Great. And then just really quickly on the tax rate. This quarter was little lower than we thought it was going to be, maybe 200 basis points lower from the comments you had made in previous quarters. And you have the same tax rate guidance for fiscal '08 that you had talked about previously and yet the number was lower this quarter by a substantial amount. I was wondering if you could just connect the dots there for me.

Richard J. Meelia - President and Chief Executive Officer

Sure. I think that we've always said that, that this year our tax rate would be in the 28% to 30% range. And then once we have the full year separate from Tyco in the 30% to 32% range. So I don't know if you're interpreting that we're at 30% to 32% this year. But we did finish a little below 28% in the quarter. The increase next year is really result of us separated from Tyco and some of the loss synergies that we had, as part of that separation and we'll realize the full year impact of that.

As far as... what I mentioned before, we plan on taking that rate down over the next couple of years by 200 to 300 basis points.

Robert Hopkins - Lehman Brothers

Great. Okay thanks, and congrats on your first quarter out.

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Thank you, Bob.

Coleman N. Lannum - Vice President of Investor Relations

Thanks Bob. Next question.

Operator

From Kristen Stewart with Credit Suisse. Please proceed.

Richard J. Meelia - President and Chief Executive Officer

Good morning, Kristen.

Kristen Stewart - Credit Suisse

Hi. Good morning guys. Just a quick question on the other expense line item within the quarter, the $15 million income; what exactly was that?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

This is Chuck, Kristen. Part of that is... part of the tax accounting that we have in these shared liabilities with Tyco and Tyco Electronics. We are responsible for some of the liabilities of the combined entities. As we increase those, we're only responsible for 42% of them. So we booked a receivable for the 58% from the other two entities, and that increase is going through as income in other income and it flows through that line item.

Previously, we had given some guidance in the Form-10. We outlined it. We thought that the shared liabilities that we had with both Tyco and Electronics, which is what we owed to them, that we would have to accrete interest on that to the tune of $20 million to $30 million per year. We booked that at the end of the last quarter really under FIN 45 which is the accounting and disclosure requirements for guarantees. And when you go through and book that liability, you sit there and factor in the probability and timing your cash flows, you incorporate a risk premium. And in doing that you don't have to accrete any interest on the liability as you move forward. So it's some of the complexity we have around, some of the tax sharing agreements with Tyco, and this is some of the ways that could continue on that line as we move forward.

Kristen Stewart - Credit Suisse

And just on the write-off for the Retail business, I can't resist, 144 says that within kind of looking at different asset groups that one of the considerations is realization that more likely than not, you're going to be disclosing of it. Is that at all taking into consideration with the write-downs?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Not really. Well see first of all, we don't comment... we've been very strict about this. Anything about divestitures of our businesses, we think that impacts them but the Rule 144 is really a result of a particular event which, sale of business could be one of them. But there are other things that could trigger that, which is adverse material conditions in the business or the environment in which it operates. So any of those things could trigger the 144 rule for the impairment.

Kristen Stewart - Credit Suisse

And then last question is, I am sure you guys saw Bristol yesterday announced that they were going to be selling their medical imaging business. Nordion had some challenges there. What do you guys think about the environment going forward with the sale of Bristol asset and maybe some of the challenges the other competitors are having?

Richard J. Meelia - President and Chief Executive Officer

Sure, Kristen, it's Rich. As you know, we announced a price increase for our Technetium Generator and the primary reason was that the complexity and the fragility of that entire supply chain is such that we did not feel we were getting proper value for what the business warranted, given all the complexities associated with it. And so we believe this is just another example as to why that the price increase was warranted.

In terms of what will be different with this business in the hands of another competitor, we really can't predict. But we're pretty focused on what we're trying to do. We've got our sales increasing very nicely in the Radiopharmaceutical area. And the focus over the next couple of years is to bring the margins back and things like the price increase and potential generic event we think will help us accomplish that goal over the next two to three years.

Kristen Stewart - Credit Suisse

Thank you.

Richard J. Meelia - President and Chief Executive Officer

You're welcome.

Coleman N. Lannum - Vice President of Investor Relations

Thanks Kristen. Next question please.

Operator

From Tao Levy with Deutsche Bank. Please proceed.

Tao Levy - Deutsche Bank

Hey good morning.

Richard J. Meelia - President and Chief Executive Officer

Good morning, Tao.

Tao Levy - Deutsche Bank

I guess I wanted to ask a little bit on the pulse oximetry business. You mentioned obviously that slowed down a little bit. Can you talk about probably some future products or innovations that you might be bringing in to address that and obviously one of your major competitors in that space is... appears to be taking some significant market share and again just if you can comment, ways to address that. Thanks.

Jose E. Almeida - President, Medical Devices

Yes. We're not happy with the performance... current performance. We've been improving our performance for the last two years. We had flat growth in 2006 and then we experienced close to 5% in 2007 for the full year for this business. We started the investment by relocating the headquarters from Placentia, California to Boulder where technical personnel is more readily available. We have several programs in place. We have a very active R&D as well licensing going on right now. We probably will be seeing the results of this offering in 12 to 24 months.

Tao Levy - Deutsche Bank

Perfect. Okay. And just also a clarification on... in the press releases you mentioned that your gross margins benefited a bit from foreign currency. And then I think in later on in your comments you mentioned that... that had a negative impact on SG&A. So I was just wondering if that's the right way to think of the hedging program that you have there, as well as if you could squeeze out the FX benefit in gross margin.

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Yes, as far as the impact and where this flows through the P&L, most all of the FX changes, does end up in the gross margin line. Because of the way you account for these hedges, you do adjust them to market at the end of each accounting period and that adjustment to market goes down into G&A. But going forward, over time the length of the contract that zeroes out on that line item. So there is timing between quarters as how it impacts the G&A piece but eventually all ends up into gross margins. The way this specific impact was in the year related to FX. I don't have but in a way of thinking about it, we shipped approximately $400 million of products from the U.S. to Europe, and you can kind of equate that with the change in currency and the impact to our cost of sales.

Tao Levy - Deutsche Bank

Great.Thanks and then just a last one. The stickiness of the price increase... maybe if you can just comment on the market dynamics there for the Technetium. And that's it, thanks.

Richard J. Meelia - President and Chief Executive Officer

Sure. Tao, this is Rich. I think we announced our price increase four to six weeks ago, and you may or may not know that our competitor followed with its own price increase a couple of weeks back. So I think everyone involved in the manufacture of these products recognizes that we weren't receiving sufficient value for the risk that we incur in being in this business.

Operator

And your next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.

Richard J. Meelia - President and Chief Executive Officer

Good morning Joanne.

Joanne Wuensch - BMO Capital Markets

Good morning. How are you?

Richard J. Meelia - President and Chief Executive Officer

Good. Thank you.

Joanne Wuensch - BMO Capital Markets

A couple of questions. Explain to me how we go from negative 23% growth in retail to flat to down 5% next year?

Richard J. Meelia - President and Chief Executive Officer

Sure. We have experienced some loss of business which we intentionally exited in order to improve our margins which has been a successful endeavor as we've taken our margins up by... in excess of 50%. But over the course of fiscal 2008 we anticipate certain strategies that have been utilized by the brand... by some of our branded competitors especially as it relates to price to subside. And we also are planning for a price increase in the second quarter. It's a price increase that's been announced by virtually all of the players, at least us in the two major branded players. And so we expect to get the benefit of that price increase, sometime during the second quarter. And then as you look at the third and fourth quarters, the comparisons that will have to those quarters, so will work in our favor.

Joanne Wuensch - BMO Capital Markets

Are there segments of this... segment of course the products in the segment that you just shouldn't have anymore?

Richard J. Meelia - President and Chief Executive Officer

WellI don't know if I say that. The pressure is primarily baby diapers in that business.

Joanne Wuensch - BMO Capital Markets

I'll not ask what those are. The second question I have has to do with the... there is a potential ruling out there for reimbursement for home diagnosis of obstructive sleep apnea. Are you positioned to take advantage of it if it should go through?

Richard J. Meelia - President and Chief Executive Officer

Yes,we're actually just in the process of launching our new Sandman home diagnostic device. And we view it as a being on the edge from a technology standpoint. Who knows exactly how this ruling will ultimately end up, but we think that anything that changes the kind of channel control away from the current arrangement where the two strong players in this business have a lot of control over their channel. And if a home diagnostic device would be approved, then it would certainly affect those market dynamics and we believe that we could take advantage of that change given the technology that we have especially with this new Sandman diagnostic device.

Joanne Wuensch - BMO Capital Markets

Thank you very much.

Richard J. Meelia - President and Chief Executive Officer

You are welcome Joanne.

Operator

[Operator Instructions]. And your next question is a follow-up question from the line of Glenn Reicin with Morgan Stanley. Please proceed.

Glenn Reicin - Morgan Stanley

Hi. Can you just call out the acquisitions in the quarter and for the year and tell us what the contribution was?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Just one second Glenn. We'll have those numbers for you.

Glenn Reicin - Morgan Stanley

Okay.

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Yes, in the quarter, about a $11 million of revenue came from acquisitions.

Glenn Reicin - Morgan Stanley

And for the year?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

$63 million, about 1%.

Glenn Reicin - Morgan Stanley

Okay. Anyway you would just highlight the bigger contributors, Airox or --

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Airox, Floreane, Confluent, those products... those acquisitions.

Glenn Reicin - Morgan Stanley

Can you quantify any of those?

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

I'll tell... let's do that offline. We just don't have the numbers right here with us, now right Glenn.

Glenn Reicin - Morgan Stanley

I got it. That's fine.

Jose E. Almeida - President, Medical Devices

Glenn, just one other thing, for the year we did have divest... a divestiture which offset that.

Glenn Reicin - Morgan Stanley

Okay. And how big is... how big was that?

Richard J. Meelia - President and Chief Executive Officer

In a similar kind of magnitude.

Glenn Reicin - Morgan Stanley

And then related to retail you did mention sales were down considerably, are profits up [ph].

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Profitability as a percent of sales, and profits were up.

Glenn Reicin - Morgan Stanley

Great. Thank you.

Operator

Your next question comes from the line of Doug Scholasis [ph] with Gates Capital Management. Please proceed.

Unidentified Analyst

Yes, I was just curious what the cash and total debt were at the end of the year.

Charles J. Dockendorff - Executive Vice President and Chief Financial Officer

Yes the debt balance was right at $4.1 billion which was a debt to cap of 41%. Cash was over $8 million.

Unidentified Analyst

And what do you expect the capital spending to be for next year and what are the major uses of cash for capital expenditures?

Richard J. Meelia - President and Chief Executive Officer

Capital expenditures, we are planning it to be in the $400 million to $450 million range. These are... a lot of these are focused again on some of the cost reductions. Some of these are related to the restructuring programs that we have announced which again are generating cost savings. Some of these are capacity improvements and some of these are investments in some of our research and development facilities as we continue to invest in those areas.

Unidentified Analyst

Okay. Thank you.

Operator

And there are no additional questions at this time. I would now like to turn the call back over to management for closing remarks.

Coleman N. Lannum - Vice President of Investor Relations

Okay. Thank you very much, Carol. Thank you everyone for listening to the call. Starting at noon eastern today, a replay of the call will be available. Additionally the replay will be available on our corporate website covidien.com a few hours from now. For those with the media who have listened the call and have additional questions please contact Eric Kraus, our Head of Corporate Communications and for anyone else having more detailed questions involving non-material information, Wade and I'll be available latter on to take your call. Thanks again and have a great day. Bye, bye.

Operator

Thank you for joining on today's conference. You may now disconnect and have a happy holiday.

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