DUBLIN--(BUSINESS WIRE)--Covidien plc (NYSE: COV) today reported results for the third quarter of fiscal 2009 (April – June 2009). Third-quarter net sales declined 3% to $2.5 billion from $2.6 billion a year ago, with unfavorable foreign exchange of $143 million reducing the quarterly sales growth rate by approximately 5 percentage points. Operational growth, which excludes the impact of foreign exchange, was 2%, driven primarily by higher volume and new products.

Third-quarter gross margin of 54.4% was up 0.7 percentage points from the prior-year period. The improvement reflected manufacturing cost reductions, benefits from our restructuring program and positive mix in Medical Devices and Pharmaceutical Products, partially offset by unfavorable foreign exchange.

Selling, general and administrative expenses for the third quarter of fiscal 2009 were below those of the year-ago third quarter, as planned increases in selling and marketing were more than offset by benefits from foreign exchange. Research and Development (R&D) expense in the quarter climbed 53% from that of the prior year and represented 5.2% of net sales. Third-quarter R&D expense included $30 million in licensing fees related to two previously announced transactions in the Pharmaceutical Products segment.

In the third quarter, the Company reported operating income of $441 million, versus $545 million in the same period the year before. Third-quarter adjusted operating income, excluding the specified items shown in the attached quarterly Non-GAAP Reconciliations table, was $535 million, versus $563 million in the third quarter of the previous year. Third-quarter adjusted operating income, excluding the specified items, represented 21.3% of sales, versus 21.7% a year ago.

The third-quarter effective tax rate was negatively impacted by a charge of $59 million for in-process R&D for which no tax benefit was recorded. The effect of this charge was to increase the tax rate to 33.9%; excluding this charge and other specified items, the third-quarter tax rate was 25.6%.

Third-quarter diluted GAAP earnings per share from continuing operations were $0.54, versus $0.65 per share in the third quarter of last year. The third-quarter adjusted diluted earnings per share, excluding the specified items, were $0.74, versus $0.72 a year ago.

For the first nine months of fiscal 2009, net sales of $7.7 billion were 5% above the $7.3 billion in the prior year, with unfavorable foreign exchange lowering the sales growth rate by approximately 5 percentage points. Sales rose 13% in the United States, but declined 5% outside the U.S., reflecting non-U.S. operational growth of 6% and a negative currency impact of 11%. Operational growth, excluding the impact of oxycodone hydrochloride extended-release tablets (Oxy ER), was 5%.

The Company reported operating income of $1.50 billion in the first nine months of fiscal 2009, versus $1.41 billion in the comparable period a year ago. Nine-month adjusted operating income, excluding the items specified in the attached nine-month Non-GAAP Reconciliations table, as well as Oxy ER, was $1.50 billion, versus $1.54 billion in the previous year. Nine-month 2009 adjusted operating income, excluding specified items and Oxy ER, represented 20.5% of sales, versus 20.9% a year ago.

The effective tax rate was 42.0% for the first nine months of fiscal 2009. Excluding the specified items, the adjusted tax rate for the first nine months was 25.6%.

For the first nine months of 2009, diluted GAAP earnings per share from continuing operations were $1.62, versus $2.03 in the first nine months of 2008. Excluding the specified items and Oxy ER, adjusted diluted earnings per share from continuing operations were $2.07, versus $1.97 a year ago.

“We delivered good operational performance in line with our expectations, despite the global economic slowdown,” said Richard J. Meelia, Chairman, President and CEO. ”We continue to benefit from several successful new product launches and market share gains.

“Results in the Pharmaceutical Products segment were below our expectations, primarily reflecting significantly lower sales in our branded product portfolio, a slowdown in active pharmaceutical ingredients and the timing of orders. Over the next 18 months, we expect difficult comparisons in this business, but that should ease, starting in 2011, depending on the timing of new product approvals. Overall, total Company performance remains on plan, and we are confident we will end the year at the high end of our overall financial expectations,” Mr. Meelia added.

Results by business segment follow.

Medical Devices sales of $1.7 billion in the third quarter were 3% below the $1.8 billion in the comparable quarter of last year. Operational growth was 4%, reflecting new products and higher volume. Operationally, sales in Endomechanical were above those of a year ago, fueled by higher sales of laparoscopic instruments. The Energy double-digit quarterly sales gain was again paced by vessel sealing products, partially offset by a continued slowdown in capital-related hardware products. The sales growth in Soft Tissue Repair was led by mesh products, somewhat offset by lower sales of sutures. Vascular sales rose at a double-digit pace, due to a strong performance by dialysis products and increases in compression. In Airway and Ventilation, quarterly operational sales were down slightly, chiefly reflecting lower ventilator sales in the U.S. that stemmed from capital spending constraints, and in part due to a sharp decline in sales of sleep products.

For the first nine months of fiscal 2009, Medical Devices sales were essentially unchanged at $5.0 billion. Unfavorable foreign exchange reduced the sales growth rate by approximately 6 percentage points.

Imaging Solutions third-quarter sales declined 6% to $299 million from $319 million a year ago. Unfavorable foreign exchange accounted for approximately 5 percentage points of the decrease. Radiopharmaceuticals sales in the quarter were slightly below those of the year before, due to unfavorable foreign exchange. Operational growth was aided by higher generator pricing, but restrained by the unstable molybdenum supply chain. Third-quarter sales of Contrast Products were well below year-ago levels, reflecting unfavorable foreign exchange, lower volume and strong competitive activity in the U.S. In addition, sales of capital equipment to hospitals, including urology tables and power injectors, were below those of the prior year.

For the first nine months of fiscal 2009, Imaging Solutions sales fell 8% to $840 million, versus $914 million the year before. Unfavorable foreign exchange contributed about 5 percentage points to the sales decline.

Pharmaceutical Products sales of $245 million in the third quarter were 5% below those of the prior year’s $257 million. Unfavorable foreign exchange contributed about 3 percentage points to the decrease. The quarter’s decline was primarily due to lower sales of Active Pharmaceutical Ingredients, driven by significant decreases in narcotics and peptides, partially offset by higher sales of acetaminophen. Sales of Specialty Pharmaceuticals (formerly called Dosage Pharmaceuticals) were slightly below those of a year ago, as sharply lower sales of branded products were partially offset by strong growth for oxycodone immediate-release, which benefited from a competitive supply constraint.

For the first nine months of fiscal 2009, Pharmaceutical Products sales climbed 53%, from $717 million last year to $1.1 billion, with oxycodone hydrochloride extended-release tablets contributing $354 million. Excluding Oxy ER, Pharmaceutical Products sales of $741 million were 3% above those of the prior year.

Medical Supplies third-quarter sales of $238 million were unchanged from those of the previous year. Higher sales of Nursing Care products were essentially offset by lower OEM sales. For the first nine months of fiscal 2009, sales of Medical Supplies, at $716 million, were 6% above last year’s $675 million.

During the quarter, Covidien purchased approximately 2 million ordinary shares under its previously announced share buyback program.

The Company also announced that it was making several reporting changes to align external segment reporting with recent revisions in its internal reporting structure. These segment changes have no impact on results of operations, financial condition or cash flows of the Company as a whole.

The revisions include the combination of the Pharmaceutical Products and Imaging Solutions segments into a single operating segment; the reclassification of the SharpSafety and Clinical Care product lines from the Medical Devices segment to the Medical Supplies segment; the reclassification of several hernia repair products from the Endomechanical product line to the Soft Tissue Repair product line; and the reclassification of one product from the Contrast product line in the Imaging Solutions segment to the Vascular product line in the Medical Devices segment. These changes are effective in the fourth quarter, 2009 and the Company will provide restated historical segment financial data reflecting these changes prior to its September 10, 2009, Investor Meeting.

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 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:

• 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 866-800-8652. For participants outside the U.S., the dial-in number is 617-614-2705. The access code for all callers is 98808387.
• Through an audio replay: A replay of the conference call will be available beginning at 11:30 a.m. on July 30, 2009, and ending at 5:00 p.m. on August 6, 2009. 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 13349560.

NON-GAAP FINANCIAL MEASURES

This press release contains financial measures, including operational growth, adjusted net sales, adjusted gross margin, adjusted operating income, adjusted earnings per share and adjusted operating margin, 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 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 and effective tax rate 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 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 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.