Covidien Reports Third-Quarter Results

Covidien Reports Third-Quarter Results

• Net sales up 3% (up 5%, excluding foreign exchange rate movement); Medical Devices sales up 4% (up 6%, excluding foreign exchange rate movement)

• Third-quarter diluted GAAP earnings per share from continuing operations were $0.85; excluding specified items, adjusted diluted earnings per share from continuing operations were $0.91

DUBLIN--(BUSINESS WIRE)-- Covidien plc (NYS: COV) today reported results for the third quarter of fiscal 2013 (April - June 2013). Third-quarter net sales of $2.58 billion increased 3% from the $2.51 billion in the third quarter a year ago. Foreign exchange rate movement lowered the quarterly sales growth rate by two percentage points. The Pharmaceuticals business, which was spun off from Covidien on June 28, 2013, is reported in discontinued operations.

"We delivered a solid performance in the third quarter. Operational sales growth was in line with our expectations, but our reported sales growth was restrained by the strength of the U.S. dollar against most foreign currencies," said José E. Almeida, Chairman, President and CEO. "In the Medical Devices segment, continued strong results in stapling and vessel sealing paced our quarterly performance.

"In emerging markets, we again generated significant sales gains, reflecting the investments we've made to expand our sales force and build capabilities in these fast-growing regions," Mr. Almeida said. "With the Pharmaceuticals spin-off now behind us, we are focused on strengthening our Medical Devices and Supplies businesses through organic growth, new products and geographic expansion."

Third-quarter 2013 gross margin of 59.5% declined 0.8 percentage points from the 60.3% of the prior-year period. On an adjusted basis, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, third-quarter 2013 gross margin of 59.5% was 1.0 percentage point below that of a year ago. The decline was primarily due to unfavorable foreign exchange.

Selling, general and administrative expenses for the third quarter of 2013 were above those of the comparable quarter of the year before. This was due to unfavorable foreign exchange, the medical device tax and spending on growth initiatives, partially offset by productivity improvements. Research and development (R&D) expense represented 5.0% of net sales in the third quarters of both 2013 and 2012.

In the third quarter of 2013, the Company reported operating income of $542 million, versus $538 million in the same period the year before. Third-quarter 2013 adjusted operating income, excluding the specified items on the attached table, was $554 million, compared with $580 million in the previous year. Third-quarter 2013 adjusted operating income, excluding the specified items, represented 21.5% of sales, versus 23.1% of sales a year ago.

The third-quarter 2013 effective tax rate was 26.9%, versus an effective tax rate of 21.2% in the third quarter of 2012. The third-quarter 2013 adjusted tax rate, excluding the specified items on the attached table, was 15.8%, versus 17.7% in the third quarter a year earlier.

Diluted GAAP earnings per share from continuing operations were $0.85 in the third quarter of 2013, versus $0.81 per share in the comparable quarter last year. Third-quarter 2013 adjusted diluted earnings per share from continuing operations, excluding the specified items on the attached table, were $0.91, unchanged versus a year ago.

For the first nine months of fiscal 2013, net sales of $7.68 billion were 4% above the $7.35 billion in the first nine months of the previous year, with foreign exchange rate movement lowering the nine-month sales growth rate by two percentage points.

The Company reported operating income of $1.66 billion in the first nine months of fiscal 2013, versus $1.61 billion in the comparable period the year before. Nine-month 2013 adjusted operating income, excluding the specified items on the attached table, was $1.73 billion, versus $1.74 billion from the first nine months of the prior year. Nine-month 2013 adjusted operating income, excluding the specified items, represented 22.5% of sales, versus 23.7% a year ago.

The effective tax rate was 22.1% for the first nine months of fiscal 2013, versus an effective tax rate of 16.7% in the same period of 2012. Excluding the specified items on the attached table, the adjusted tax rate for the first nine months of 2013 was 16.5%, versus 17.2% in the first nine months of 2012.

For the first nine months of 2013, diluted GAAP earnings per share from continuing operations were $2.61, versus $2.54 in the year-ago period. Excluding the specified items on the attached table, adjusted diluted earnings per share from continuing operations were $2.81, versus $2.75 in the comparable period last year.

BUSINESS SEGMENT RESULTS

Medical Devices sales of $2.14 billion in the third quarter were 4% higher than the $2.06 billion in the comparable quarter of last year. Operational sales growth was 6%, as foreign exchange rate movement reduced the quarterly sales growth rate by two percentage points. Growth was driven by new products and increased volume. Operationally, third-quarter sales in Endomechanical were well above those of the prior year, fueled by substantial gains for stapling products that were led by our innovative Tri-Staple™ reloads. In Soft Tissue Repair, sales were about even with those of a year ago, as strong double-digit increases for synthetic mesh countered lower sales of biologic mesh. Sales of Energy products were notably above the prior year's level, primarily due to another double-digit quarterly sales gain for vessel sealing products. Sales in Oximetry & Monitoring climbed sharply from those of the year before, spurred by a sizable double-digit advance for sensors, aided by last year's Oridion acquisition. Airway & Ventilation sales were well ahead of those of the previous year, reflecting broad-based growth across the product line. Sales of Vascular products rose slightly from those of a year ago, as strong growth for chronic venous insufficiency products was offset by lower sales of compression and dialysis products. Sales growth in neurovascular and peripheral vascular was restrained by difficult comparisons with last year's third quarter.

For the first nine months of fiscal 2013, Medical Devices sales climbed 5% to $6.36 billion from $6.05 billion in the comparable period a year ago. Foreign exchange rate movement reduced the quarterly sales growth rate by two percentage points.

Medical Supplies third-quarter sales of $439 million were 1% below the $443 million reported in the comparable quarter of 2012, as higher sales of Nursing Care products were overshadowed by decreased sales of Medical Surgical, SharpSafety™ and OEM products.

For the first nine months of fiscal 2013, sales of Medical Supplies, at $1.31 billion, were 1% above last year's $1.30 billion, reflecting higher sales of Nursing Care products, led by enteral feeding.

Other

In the third quarter of 2013, Covidien purchased approximately 9.4 million ordinary shares under its previously announced share buyback programs.

ABOUT COVIDIEN

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 products in medical devices and supplies. Covidien has 38,000 employees worldwide in 70 countries, and its products are sold in over 140 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:

• At Covidien's website: http://investor.covidien.com

• By telephone: For both "listen-only" participants and those participants who wish to take part in the question-and-answer portion of the call, the telephone dial-in number in the U.S. is 866-318-8619. For participants outside the U.S., the dial-in number is 617-399-5138. The access code for all callers is 81499640.

• Through an audio replay: A replay of the conference call will be available beginning at 11:30 a.m. on August 1, 2013, and ending at 5:00 p.m. on August 8, 2013. The dial-in number for U.S. participants is 888-286-8010. For participants outside the U.S., the replay dial-in number is 617-801-6888. The replay access code for all callers is 93452168.

NON-GAAP FINANCIAL MEASURES

This press release contains financial measures, including operational growth, adjusted gross margin, adjusted operating income, adjusted earnings per share, adjusted operating margin and free cash flow, which 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 Company defines free cash flow as net cash provided by continuing operating activities less capital expenditures.

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.

FORWARD-LOOKING STATEMENTS

Any statements contained in this communication 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, our ability to effectively introduce and market new products or keep pace with advances in technology, the reimbursement practices of a small number of large public and private insurers, cost-containment efforts of customers, purchasing groups, third-party payors and governmental organizations, intellectual property rights disputes, complex and costly regulation, including healthcare fraud and abuse regulations and the Foreign Corrupt Practices Act, manufacturing or supply chain problems or disruptions, rising commodity costs, recalls or safety alerts and negative publicity relating to Covidien or its products, product liability losses and other litigation liability, divestitures of some of our businesses or product lines, our ability to execute strategic acquisitions of, investments in or alliances with other companies and businesses, competition, risks associated with doing business outside of the United States, foreign currency exchange rates and environmental remediation costs. These and other factors are identified and described in more detail in our Annual Report on Form 10-K for the fiscal year ended September 28, 2012, and in subsequent filings with the SEC. We disclaim any obligation to update these forward-looking statements other than as required by law.