Covidien Reports Fourth-Quarter and Fiscal 2008 Results

HAMILTON, Bermuda--(BUSINESS WIRE)-- Covidien Ltd. (NYSE: COV; BSX: COV) today reported results for the fourth quarter of fiscal 2008 (July – September 2008). Fourth-quarter net sales rose 12% to $2.6 billion from $2.3 billion a year ago, fueled by strong growth in the Medical Devices, Pharmaceutical Products and Medical Supplies business segments. Sales growth was driven by higher volume and new products. Favorable foreign exchange contributed 3 percentage points to the sales increase. All International regions -- Europe, Asia-Pacific and Other Americas -- reported strong double-digit sales gains.

Fourth-quarter gross margin of 54.6% was up 2.8 percentage points from the prior year period. This significant improvement reflected favorable foreign exchange and positive product mix, including benefits from the launch of new products in the Dosage pharmaceutical business. Improvement was also aided by the incremental investments made to grow the Company’s higher-margin businesses.

Selling, general and administrative expenses were higher than in the fourth quarter of last year. The increase was attributable to planned growth in selling and marketing investments, foreign exchange and higher administrative costs. Research and Development (R&D) expense in the quarter was up 41% over the prior year and represented 4.0% of sales.

For the fourth quarter, the Company reported operating income of $541 million, versus $386 million a year ago. Fourth-quarter adjusted operating income, excluding the specified items shown in the attached Quarterly Non-GAAP Reconciliations table, was $552 million, versus $447 million in the fourth quarter of the prior year. Fourth-quarter adjusted operating income represented 21.5% of sales, versus 19.5% a year ago.

The fourth-quarter effective tax rate was 18.4%. Excluding the specified items shown in the Quarterly Non-GAAP Reconciliations table, the fourth-quarter tax rate was 27.0%. The rate was lower primarily due to favorable foreign exchange offset by changes to certain non-U.S. tax rates.

Fourth-quarter diluted GAAP earnings per share from continuing operations were $0.82, versus $0.52 per share in the fourth quarter of last year. The fourth-quarter non-GAAP diluted earnings per share, excluding the specified items shown in the Quarterly Non-GAAP Reconciliations table, were $0.73, versus $0.62 a year ago.

For fiscal 2008, net sales of $9.9 billion were 11% above the $8.9 billion in the prior year, with favorable foreign exchange contributing 4 percentage points to the sales increase.

The Company reported operating income of $1.95 billion in fiscal 2008 versus $585 million the year before. Fiscal 2008 adjusted operating income, excluding the specified items shown in the Annual Non-GAAP Reconciliations table, was $2.09 billion, representing 21.1% of sales, versus $1.92 billion and 21.5% of sales a year ago.

The effective tax rate was 27.1% for fiscal 2008. Excluding the specified items shown in the Annual Non-GAAP Reconciliations table, the tax rate for the year was 29.2%.

Fiscal 2008 diluted GAAP earnings per share from continuing operations were $2.86, versus a loss of $0.33 per share in the prior year. The fiscal 2008 non-GAAP diluted earnings per share, excluding the specified items shown in the Annual Non-GAAP Reconciliations table, were $2.70, versus $2.63 a year ago.

“We finished fiscal 2008 with our strongest quarterly operational results since becoming a public company in mid-2007,” said Chairman, President and Chief Executive Officer Richard J. Meelia. “Growth was broad-based, with three of our four segments reporting double-digit increases. Our performance was especially strong in markets outside the U.S., as we continued to benefit from the incremental investments made over the last few years to augment our sales force and expand geographically. Our Imaging segment, however, posted disappointing fourth-quarter results, but we have plans in place designed to improve its performance going forward.

“Looking at 2009, we remain comfortable with the operational growth targets communicated at our Investor Day in September,” Mr. Meelia said. “Although reported results will most likely be negatively impacted by the recent strengthening of the U.S. dollar, we have a strong pipeline of new products, fueled by strategic investments in R&D, that will enhance our growth in the coming year and beyond.”

Results by business segment follow.

Medical Devices sales of $1.7 billion in the fourth quarter were up 10% from $1.6 billion in the comparable quarter of last year. The sales gain was aided by favorable foreign exchange, which contributed 4 percentage points to the increase, as well as by new products and higher volume. Sales in Endomechanical were well above those of a year ago, led by sharply higher sales of laparoscopic instruments. Energy again registered strong double-digit quarterly growth, paced by vessel sealing and hardware products. Sales in Soft Tissue Repair climbed significantly, driven by stronger sales of hernia mesh products.

For fiscal 2008, Medical Devices sales grew 12% to $6.8 billion from $6.0 billion a year ago. Favorable foreign exchange contributed 6 percentage points to the sales advance.

Imaging Solutions fourth-quarter sales rose 3% to $300 million from $291 million a year ago, with the entire gain attributable to favorable foreign exchange. Radiopharmaceutical sales were above those of the year before, while Contrast Product sales were unchanged, reflecting lower volume and continued pricing pressures in the United States.

For the fiscal year, Imaging Solutions sales climbed 13% to $1.2 billion versus $1.1 billion last year. Favorable foreign exchange contributed 5 percentage points to the sales increase.

Pharmaceutical Products sales of $296 million in the fourth quarter were 37% above the prior year’s $216 million. Growth was attributable to significantly higher sales of Dosage pharmaceuticals, due largely to the launches of oxycodone hydrochloride extended-release tablets and TussiCaps^® extended-release capsules late in the quarter. Dosage sales in the quarter also benefited from a competitor’s continued supply constraints. The strong Dosage increase more than offset lower sales of Active Pharmaceutical Ingredients, reflecting a decline for narcotic products.

For the fiscal year, Pharmaceutical Products sales were up 12% to $1.0 billion from $908 million last year.

Medical Supplies fourth-quarter sales grew 10% to $245 million from $223 million in the fourth quarter of the previous year. The increase was primarily due to higher sales of Nursing Care and OEM products.

For the fiscal year, Medical Supplies sales, at $920 million, were 4% above last year’s $887 million.

FISCAL 2009 OUTLOOK

The Company has updated its fiscal 2009 guidance to reflect the recent strengthening of the US dollar against most currencies which negatively impacts sales and profit growth in the Medical Devices and Imaging Solutions segments. The Company now estimates that sales in the 2009 fiscal year will be flat to up 3%, including foreign exchange at current rates. Operational growth, excluding foreign exchange, remains at the previously communicated range of 6% to 9% for fiscal 2009. Including foreign exchange at current rates, net sales are expected to be -3% to flat versus 2008 in the Medical Devices segment and -4% to -1% in Imaging Solutions. There are no changes to previous 2009 guidance for the Pharmaceutical Products or Medical Supplies segments, where sales are expected to increase 20%+ and 2% to 5%, respectively. Including foreign exchange at current rates and excluding the impact of one-time items, the operating margin is expected to be in the 21.5% to 22.5% range, consistent with prior guidance. We now anticipate the effective tax rate will be in the 28% to 31% range for fiscal 2009, excluding the impact of one-time items.

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 2008 revenue of nearly $10 billion, Covidien has more than 41,000 employees worldwide in 59 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:

• Web – Go to Covidien’s website at www.covidien.com. A replay of the call will be available through November 24 at the same website.
• Telephone – The dial-in number for participants in the United States is (866)-800-8649. For participants outside the United States, the dial-in number is (617)-614-2703. The access code for both numbers is 91716204.
• Audio replay – The conference call will be available for replay, beginning at 10:30 a.m. ET on November 17, 2008, and ending at 11:59 p.m. on November 24, 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 97956744.

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.

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, 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 payers and governmental organizations, intellectual property rights disputes, complex and costly regulation, including healthcare fraud and abuse regulations, 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, including legacy Tyco-related litigation, 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, issues related to our existing material weakness in accounting for income taxes or potential environmental liabilities. 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.

⁽¹⁾ Sales to external customers are reflected in the regions based on the location of the sales force executing the transaction.

⁽¹⁾ The common shares outstanding immediately following the separation from Tyco International were used to calculate basic and diluted earnings per share prior to the separation because no common shares, share options or restricted shares of Covidien were outstanding on or before June 29, 2007.

⁽¹⁾ Sales to external customers are reflected in the regions based on the location of the sales force executing the transaction.