XNYS:COV Covidien PLC Quarterly Report 10-Q Filing - 3/30/2012

Effective Date 3/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 30, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

001-33259

(Commission File Number)

 

 

COVIDIEN PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Ireland   98-0624794

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

20 On Hatch, Lower Hatch Street

Dublin 2, Ireland

Telephone: +353 1 438-1700

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of ordinary shares outstanding as of April 30, 2012 was 482,278,133.

 

 

 


Table of Contents

COVIDIEN PLC

INDEX TO FORM 10-Q

 

          Page  

Part I.

   Financial Information   

Item 1.

   Financial Statements      2   
  

Consolidated Statements of Income for the Quarters and Six Months Ended March 30, 2012 and March 25, 2011

     2   
   Consolidated Balance Sheets as of March 30, 2012 and September 30, 2011      3   
  

Consolidated Statements of Cash Flows for the Six Months Ended March 30, 2012 and March 25, 2011

     4   
   Notes to Consolidated Financial Statements      5   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      44   

Item 4.

   Controls and Procedures      44   

Part II.

   Other Information   

Item 1.

   Legal Proceedings      45   

Item 1A.

   Risk Factors      45   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      45   

Item 3.

   Defaults Upon Senior Securities      45   

Item 5.

   Other Information      45   

Item 6.

   Exhibits      45   

Signatures

     46   


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

COVIDIEN PLC

CONSOLIDATED STATEMENTS OF INCOME

Quarters and Six Months Ended March 30, 2012 and March 25, 2011

(in millions, except per share data)

 

     Quarters Ended     Six Months Ended  
     March 30,
2012
    March 25,
2011
    March 30,
2012
    March 25,
2011
 

Net sales

   $ 2,946      $ 2,801      $ 5,844      $ 5,570   

Cost of goods sold

     1,240        1,205        2,437        2,403   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,706        1,596        3,407        3,167   

Selling, general and administrative expenses

     914        853        1,821        1,714   

Research and development expenses

     167        130        311        249   

Restructuring charges (credits), net

     16        (2     30        51   

Shareholder settlement income

     —          —          —          (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     609        615        1,245        1,164   

Interest expense

     (51     (50     (102     (102

Interest income

     6        6        12        11   

Other income (expense), net

     4        (1     6        12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     568        570        1,161        1,085   

Income tax expense

     77        111        176        194   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     491        459        985        891   

Income (loss) from discontinued operations, net of income taxes

     6        (4     6        (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 497      $ 455      $ 991      $ 882   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share:

        

Income from continuing operations

   $ 1.02      $ 0.93      $ 2.04      $ 1.80   

Income (loss) from discontinued operations

     0.01        (0.01     0.01        (0.02

Net income

     1.03        0.92        2.05        1.78   

Diluted earnings per share:

        

Income from continuing operations

   $ 1.01      $ 0.92      $ 2.02      $ 1.79   

Income (loss) from discontinued operations

     0.01        (0.01     0.01        (0.02

Net income

     1.02        0.91        2.04        1.77   

Weighted-average number of shares outstanding:

        

Basic

     483        494        483        495   

Diluted

     487        499        487        498   

Cash dividends declared per ordinary share

   $ 0.45     $ 0.40     $ 0.45     $ 0.40   

See Notes to Consolidated Financial Statements.

 

2


Table of Contents

COVIDIEN PLC

CONSOLIDATED BALANCE SHEETS

At March 30, 2012 and September 30, 2011

(in millions, except share data)

 

     March 30,
2012
    September 30,
2011
 

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 1,663      $ 1,503   

Accounts receivable trade, less allowance for doubtful accounts of $43 and $39

     1,874        1,744   

Inventories

     1,640        1,513   

Prepaid expenses and other current assets

     905        1,013   
  

 

 

   

 

 

 

Total current assets

     6,082        5,773   

Property, plant and equipment, net

     2,769        2,705   

Goodwill

     7,961        7,683   

Intangible assets, net

     2,836        2,764   

Due from former parent and affiliate

     589        583   

Other assets

     917        866   
  

 

 

   

 

 

 

Total Assets

   $ 21,154      $ 20,374   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current Liabilities:

    

Current maturities of long-term debt

   $ 511      $ 11   

Accounts payable

     591        576   

Accrued and other current liabilities

     1,462        1,611   

Income taxes payable

     50        97   

Guaranteed contingent tax liabilities

     29        105   
  

 

 

   

 

 

 

Total current liabilities

     2,643        2,400   

Long-term debt

     3,824        4,197   

Income taxes payable

     1,660        1,629   

Guaranteed contingent tax liabilities

     597        555   

Other liabilities

     1,899        1,776   
  

 

 

   

 

 

 

Total Liabilities

     10,623        10,557   

Commitments and contingencies (note 14)

    

Shareholders’ Equity:

    

Preference shares, $0.20 par value, 125,000,000 authorized; none issued

     —          —     

Ordinary shares, $0.20 par value, 1,000,000,000 authorized; 516,981,129 and 513,786,482 issued

     103        103   

Ordinary shares held in treasury at cost; 34,871,052 and 31,828,437

     (1,594     (1,436

Additional paid-in capital

     6,978        6,844   

Retained earnings

     4,682        3,908   

Accumulated other comprehensive income

     362        398   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     10,531        9,817   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 21,154      $ 20,374   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

COVIDIEN PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended March 30, 2012 and March 25, 2011

(in millions)

 

     Six Months Ended  
     March 30,
2012
    March 25,
2011
 

Cash Flows From Operating Activities:

    

Net income

   $ 991      $ 882   

(Income) loss from discontinued operations, net of income taxes

     (6     9   
  

 

 

   

 

 

 

Income from continuing operations

     985        891   

Adjustments to reconcile net cash provided by continuing operating activities:

    

Depreciation and amortization

     306        287   

Share-based compensation

     41        55   

Deferred income taxes

     (73     26   

Provision for losses on accounts receivable and inventory

     12        30   

Other non-cash items

     5        18   

Changes in assets and liabilities, net of the effects of acquisitions and divestitures:

    

Accounts receivable, net

     (143     (71

Inventories

     (133     (107

Accounts payable

     17        (28

Income taxes

     70        (12

Accrued and other liabilities

     (176     (161

Other

     5        (29
  

 

 

   

 

 

 

Net cash provided by operating activities

     916        899   
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Capital expenditures

     (250     (167

Acquisition-related payments, net of cash acquired

     (352     —     

Sale of investments

     3        14   

Other

     2        (6
  

 

 

   

 

 

 

Net cash used in investing activities

     (597     (159
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Net issuance (repayment) of commercial paper

     132        (215

Repayment of debt

     (3     (254

Dividends paid

     (217     (198

Repurchase of shares

     (158     (102

Proceeds from exercise of share options

     81        73   

Other

     13        4   
  

 

 

   

 

 

 

Net cash used in financing activities

     (152     (692
  

 

 

   

 

 

 

Effect of currency rate changes on cash

     (7     16   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     160        64   

Cash and cash equivalents at beginning of period

     1,503        1,565   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,663      $ 1,629   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Basis of Presentation—The accompanying financial statements reflect the consolidated operations of Covidien plc and its subsidiaries (Covidien or the Company). The unaudited consolidated financial statements have been prepared in United States dollars, in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of the consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results may differ from those estimates. In management’s opinion, the unaudited consolidated financial statements contain all normal recurring adjustments necessary for a fair presentation of the interim results reported. The year-end balance sheet data were derived from audited consolidated financial statements, but do not include all of the annual disclosures required by GAAP; accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

Recently Adopted Accounting Pronouncements—In May 2011, the Financial Accounting Standards Board (FASB) updated the accounting guidance related to fair value measurements. This amendment results in convergence of fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards (IFRS). The Company adopted this amendment in the second quarter of fiscal 2012. The required disclosures regarding fair value measurements are presented in note 12.

2. Acquisitions and License Agreement

BÂRRX Medical, Inc.—On January 5, 2012, the Company’s Medical Devices segment acquired all of the outstanding equity of BÂRRX Medical, Inc. (BÂRRX), a developer of bipolar radiofrequency ablation devices used in the treatment of Barrett’s esophagus syndrome, for total consideration of $393 million. The total purchase consideration was comprised of an upfront cash payment of $322 million, net of cash acquired of $16 million, and the fair value of contingent consideration of $71 million. The contingent consideration, which could total $75 million, consists of a milestone payment related to the achievement of health insurance coverage targets for procedures utilizing BÂRRX devices. The acquisition of BÂRRX expands the Company’s ability to treat gastrointestinal diseases.

The following amounts represent the fair value of the identifiable assets acquired and liabilities assumed:

 

(Dollars in millions)

      

Deferred tax assets (current)

   $ 27   

Other current assets(1)

     27   

Intangible assets

     139   

Goodwill (non-tax deductible)

     266   

Other assets

     2   
  

 

 

 

Total assets acquired

     461   
  

 

 

 

Current liabilities

     6   

Deferred tax liabilities (non-current)

     46   

Contingent consideration

     71   
  

 

 

 

Total liabilities assumed

     123   
  

 

 

 

Net assets acquired

   $ 338   
  

 

 

 

 

(1)

This amount includes $6 million of accounts receivable, which is also the gross contractual value. As of the acquisition date, the fair value of accounts receivable approximated carrying value.

 

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Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Intangible assets acquired consist of the following:

 

(Dollars in Millions)

   Amount      Weighted-Average
Amortization Period

Completed technology

   $ 85       15 years

Customer relationships

     54       11 years
  

 

 

    
   $ 139       13 years
  

 

 

    

The primary factors which contributed to an acquisition price in excess of the fair value of net assets acquired and the establishment of goodwill were the strategic benefit of adding a clinically proven radiofrequency ablation device to the Company’s surgical energy device product portfolio and the synergies expected to result from combining infrastructures and reducing operational expenses.

As of March 30, 2012, the Company had not yet finalized its valuation of certain deferred tax assets and deferred tax liabilities for BÂRRX, the impact of which is not expected to have a material effect on the Company’s financial condition.

The amount of net sales and operating loss included in the Company’s results for the quarter and six months ended March 30, 2012 resulting from the acquisition of BÂRRX were $8 million and $7 million, respectively.

Maya Medical—On April 20, 2012, the Company’s Medical Devices segment acquired Maya Medical, a developer of a treatment for hypertension, for an upfront cash payment of $60 million. The Company may be required to pay up to an additional $170 million if certain regulatory and sales milestones are achieved. Due to the limited time since the acquisition date, the Company has not yet completed the initial accounting for this business combination. The amounts recognized for the major classes of assets acquired and liabilities assumed as of the acquisition date will be provided in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2012.

Newport Medical Instruments, Inc.—On May 1, 2012, the Company’s Medical Devices segment acquired Newport Medical Instruments, Inc. (Newport Medical), a designer and manufacturer of ventilators, for approximately $108 million in cash. The acquisition of Newport Medical complements the Company’s existing portfolio of acute care and home care ventilation solutions and broadens the Company’s ventilation platforms. Due to the limited time since the acquisition date, the Company has not yet completed the initial accounting for this business combination. The amounts recognized for the major classes of assets acquired and liabilities assumed as of the acquisition date will be provided in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2012.

License Agreement—During the second quarter of fiscal 2012, the Company’s Medical Devices segment entered into an exclusive licensing agreement which grants Covidien patent and product rights for two medical device product candidates that are designed to remove peripheral artery blockages. This licensing arrangement included an upfront cash payment of $12 million, which was included in research and development expenses. In addition, during the second quarter of fiscal 2012, the Company made a regulatory milestone payment of $5 million, which was capitalized as an intangible asset. Covidien may also be required to make additional payments of up to $60 million if certain regulatory and sales milestones are achieved.

3. Restructuring Charges (Credits), Net

In fiscal 2011, the Company launched a restructuring program, designed to improve the Company’s cost structure. This program includes actions across all three segments as well as corporate. The Company expects to

 

6


Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

incur charges of approximately $275 million under this program as the specific actions to execute on these initiatives are identified and approved, most of which are expected to be incurred by the end of fiscal 2014. This program excludes restructuring actions associated with acquisitions.

In fiscal 2009 and 2007, the Company launched a $200 million and a $150 million restructuring program, respectively, both of which were also designed to improve the Company’s cost structure. The Company recorded charges as the specific actions required to execute on these initiatives were identified and approved. The 2009 and 2007 programs were both substantially completed during fiscal 2011.

Net restructuring and related charges, including actions associated with acquisitions, by segment are as follows:

 

     Quarters Ended     Six Months Ended  

(Dollars in Millions)

   March 30,
2012
    March 25,
2011
    March 30,
2012
    March 25,
2011
 

Medical Devices

   $ 13      $ (3   $ 24      $ 60   

Pharmaceuticals

     5        —          11        —     

Medical Supplies

     1        —          2        (10

Corporate

     2        1        2        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Restructuring and related charges, net

     21        (2     39        51   

Less: accelerated depreciation

     (5     —          (9     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Restructuring charges (credits), net

   $ 16      $ (2   $ 30      $ 51   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the first six months of fiscal 2011, the Company reversed $10 million of restructuring reserves under the 2009 program, due to the determination that one of the restructuring actions within the Medical Supplies segment was no longer cost effective.

Net restructuring and related charges are comprised of the following:

 

     Quarters Ended     Six Months Ended  

(Dollars in Millions)

   March 30,
2012
    March 25,
2011
    March 30,
2012
    March 25,
2011
 

Acquisition-related restructuring actions

   $ 7      $ 2      $ 8      $ 22   

2011 program

     12        —          26        —     

2009 and 2007 programs

     2        (4 )     5        29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Restructuring and related charges (credits), net

     21        (2     39        51   

Less: non-cash charges, including accelerated depreciation

     (6     (1     (10     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total charges expected to be settled in cash

   $ 15      $ (3   $ 29      $ 49   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes cash activity for restructuring reserves related to acquisitions for the six months ended March 30, 2012:

 

(Dollars in Millions)

   Employee
Severance
and
Benefits
    Other     Total  

Balance at September 30, 2011

   $ 10      $ 2      $ 12   

Charges

     1        8        9   

Changes in estimate

     (1     —          (1

Cash payments

     (4     (2     (6
  

 

 

   

 

 

   

 

 

 

Balance at March 30, 2012

   $ 6      $ 8      $ 14   
  

 

 

   

 

 

   

 

 

 

The following table summarizes cash activity for restructuring reserves related to the 2011 and prior programs for the six months ended March 30, 2012, substantially all of which relates to employee severance and benefits:

 

(Dollars in Millions)

   2011 Program     2009 and 2007
Programs
    Total  

Balance at September 30, 2011

   $ 45      $ 52      $ 97   

Charges

     22        1        23   

Changes in estimate

     (2     —          (2

Cash payments

     (17     (13     (30
  

 

 

   

 

 

   

 

 

 

Balance at March 30, 2012

   $ 48      $ 40      $ 88   
  

 

 

   

 

 

   

 

 

 

Net restructuring and related charges, including associated asset impairments, incurred cumulative to date related to the 2011 program is as follows:

 

(Dollars in Millions)

   2011 Program  

Medical Devices

   $ 48   

Pharmaceuticals

     20   

Corporate

     9   
  

 

 

 

Total

   $ 77   
  

 

 

 

Restructuring reserves are reported on the Company’s consolidated balance sheets as follows:

 

(Dollars in Millions)

   March 30,
2012
     September 30,
2011
 

Accrued and other current liabilities

   $ 59       $ 66   

Other liabilities

     43         43   
  

 

 

    

 

 

 

Restructuring reserves

   $ 102       $ 109   
  

 

 

    

 

 

 

 

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Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4. Other Income (Expense), Net

Other income (expense), net was comprised of the following:

 

     Quarters Ended     Six Months Ended  

(Dollars in Millions)

   March 30,
2012
    March 25,
2011
    March 30,
2012
    March 25,
2011
 

Income under Tax Sharing Agreement (note 13)

   $ 6      $ 12      $ 7      $ 20   

Loss on investments, net

     (2     (13     (1     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

   $ 4      $ (1   $ 6      $ 12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income under Tax Sharing Agreement represents the increase to the receivable from Tyco International Ltd. and TE Connectivity Ltd. These amounts reflect 58% of the interest and other income taxes payable amounts recorded during each period that are subject to the Tax Sharing Agreement.

5. Earnings Per Share

The weighted-average ordinary shares used in the computations of basic and diluted earnings per share were as follows:

 

     Quarters Ended      Six Months Ended  

(in Millions)

   March 30,
2012
     March 25,
2011
     March 30,
2012
     March 25,
2011
 

Basic shares

     483         494         483         495   

Effect of share options and restricted shares

     4         5         4         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted shares

     487         499         487         498   
  

 

 

    

 

 

    

 

 

    

 

 

 

The computation of diluted earnings per share for the quarter and six months ended March 30, 2012, excludes approximately 1 million and 5 million shares, respectively, of options and restricted share awards because either the effect would have been anti-dilutive or the performance criteria related to the awards had not yet been met. For the quarter and six months ended March 25, 2011, the computation of diluted earnings per share excludes approximately 2 million and 10 million shares, respectively, of options and restricted share awards because either the effect would have been anti-dilutive or the performance criteria related to the awards had not yet been met.

6. Comprehensive Income

Comprehensive income was comprised of the following:

 

     Quarters Ended     Six Months Ended  

(Dollars in Millions)

   March 30,
2012
     March 25,
2011
    March 30,
2012
    March 25,
2011
 

Net income

   $ 497       $ 455      $ 991      $ 882   

Currency translation

     59         154        (38     121   

Unrealized gain on derivatives, net of income taxes

     1         3        1        4   

Change related to benefit plans, net of income taxes

     —           (4     1        (4
  

 

 

    

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 557       $ 608      $ 955      $ 1,003   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Inventories

Inventories were comprised of the following at the end of each period:

 

(Dollars in Millions)

   March 30,
2012
     September 30,
2011
 

Purchased materials and manufactured parts

   $ 356       $ 316   

Work in process

     351         310   

Finished goods

     933         887   
  

 

 

    

 

 

 

Inventories

   $ 1,640       $ 1,513   
  

 

 

    

 

 

 

8. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill were as follows:

 

(Dollars in Millions)

   Medical
Devices
    Pharmaceuticals      Medical
Supplies
     Total  

Goodwill at September 30, 2011

   $ 6,786      $ 508       $ 389       $ 7,683   

Acquisitions

     282        —           —           282   

Currency translation

     (4     —           —           (4
  

 

 

   

 

 

    

 

 

    

 

 

 

Goodwill at March 30, 2012

   $ 7,064      $ 508       $ 389       $ 7,961   
  

 

 

   

 

 

    

 

 

    

 

 

 

The gross carrying amount and accumulated amortization of intangible assets at the end of each period were as follows:

 

     March 30, 2012      September 30, 2011  

(Dollars in Millions)

   Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Amortizable:

           

Completed technology

   $ 2,347       $ 831       $ 2,208       $ 761   

Customer relationships

     856         131         801         108   

Licenses

     217         81         216         74   

Trademarks

     68         33         68         31   

Other

     44         26         45         26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,532       $ 1,102       $ 3,338       $ 1,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Amortizable:

           

Trademarks

   $ 356          $ 357      

In-process research and development

     50            69      
  

 

 

       

 

 

    

Total

   $ 406          $ 426      
  

 

 

       

 

 

    

Intangible asset amortization expense for the quarters ended March 30, 2012 and March 25, 2011 was $54 million and $50 million, respectively. Intangible asset amortization for the six months ended March 30, 2012 and March 25, 2011 was $105 million and $99 million, respectively.

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9. Retirement Plans

The net periodic benefit cost for the Company’s defined benefit pension plans was as follows:

 

     Quarters Ended     Six Months Ended  

(Dollars in Millions)

   March 30,
2012
    March 25,
2011
    March 30,
2012
    March 25,
2011
 

Service cost

   $ 5      $ 6      $ 10      $ 11   

Interest cost

     10        11        21        22   

Expected return on plan assets

     (10     (11     (21     (22

Amortization of net actuarial loss

     6        6        12        12   

Settlements and curtailments

     —          6        —          8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 11      $ 18      $ 22      $ 31   
  

 

 

   

 

 

   

 

 

   

 

 

 

The net periodic benefit cost for postretirement benefit plans for the quarters and six months ended March 30, 2012 and March 25, 2011 was not material.

10. Guarantees

Pursuant to the Separation and Distribution Agreement and Tax Sharing Agreement, the Company entered into certain guarantee commitments and indemnifications with Tyco International and TE Connectivity, which are discussed in note 13.

In disposing of assets or businesses, the Company often provides representations, warranties and indemnities to cover various risks including, unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities and legal fees related to periods prior to disposition. Except as discussed below, the Company generally does not have the ability to estimate the potential liability from such indemnities because they relate to unknown conditions. However, the Company has no reason to believe that these uncertainties would have a material adverse effect on its results of operations, financial condition or cash flows.

In connection with the sale of the Specialty Chemicals business, the Company provided the purchaser with an indemnification for various risks, including environmental, health, safety, tax and other matters, some of which have an indefinite term. However, the most significant portion of this indemnification relates to environmental, health and safety matters, which has a term of 17 years. A liability of $22 million relating to this indemnification was included on the Company’s consolidated balance sheet at both March 30, 2012 and September 30, 2011. The value of the environmental, health and safety guarantee was measured based on the probability-weighted present value of the costs expected to be incurred to address environmental claims proposed under the indemnity. The maximum future payments the Company could be required to make under the indemnification provided to the purchaser is $79 million. In addition, the Company was required to pay $30 million into an escrow account as collateral, of which $27 million remained in other assets on the consolidated balance sheet at March 30, 2012.

The Company has recorded liabilities for known indemnifications included as part of environmental liabilities, which are discussed in note 14. In addition, the Company is liable for product performance; however in the opinion of management, such obligations will not significantly affect the Company’s results of operations, financial condition or cash flows.

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11. Derivative Instruments

The Company is exposed to certain risks relating to its business operations. Risks that relate to interest rate exposure, foreign exchange exposure and certain commodity price exposures are managed by using derivative instruments. The Company uses interest rate swaps to manage interest rate exposure. Foreign currency option and forward contracts are used to economically manage the foreign exchange exposures of operations outside the United States. Swap contracts on commodities are periodically entered into to manage the price risk associated with forecasted purchases of commodities used in the Company’s manufacturing processes.

The Company recognizes all derivative instruments as either assets or liabilities at fair value on the balance sheet. Changes in a derivative financial instrument’s fair value are recognized in earnings unless specific hedge criteria are met. The Company has designated certain interest rate lock contracts and certain commodity swap contracts as cash flow hedges. The Company has not designated the foreign currency forward and option contracts as hedging instruments.

Interest Rate Exposure

Cash Flow Hedges—During fiscal 2007, Covidien International Finance S.A. (CIFSA), a wholly-owned subsidiary of the Company, entered into a series of forward interest rate lock contracts to hedge the risk of variability in the market interest rates prior to the issuance of fixed rate senior notes. The rate locks were designated as cash flow hedges at inception and were terminated in fiscal 2007 and fiscal 2008 prior to the issuance of the notes in accordance with their terms. The rate locks were considered to be highly effective, accordingly, the loss that resulted upon termination of the rate locks was recorded in accumulated other comprehensive income and is being amortized to interest expense over the terms of the notes. As of March 30, 2012 and September 30, 2011, the amount of this loss that remained in accumulated other comprehensive income was $42 million and $45 million, respectively.

Foreign Exchange Exposure

Derivatives not Designated as Hedging Instruments—The Company’s operations outside the United States are significant. As a result, the Company has foreign exchange exposure on the translation of the financial statements and on transactions denominated in foreign currencies. The Company’s policy is to use various forward and option contracts to economically manage foreign currency exposures on accounts and notes receivable, accounts payable, intercompany loans and forecasted transactions that are denominated in certain foreign currencies, principally the euro and yen, as well as over 20 other currencies. The Company generally manages its exposure for forecasted transactions for the upcoming 12 months. All forward and option contracts are recorded on the consolidated balance sheet at fair value. At March 30, 2012, the Company had foreign currency forward and option contracts outstanding with a notional amount of $816 million. These contracts do not meet the necessary criteria to qualify for hedge accounting. Accordingly, all associated changes in fair value are recognized in earnings.

The location and amount of the net gain (loss) on foreign exchange forward and option contracts not designated as hedging instruments and related hedged items were as follows:

 

     Quarters Ended     Six Months Ended  

(Dollars in Millions)

   March 30,
2012
    March 25,
2011
    March 30,
2012
    March 25,
2011
 

Cost of goods sold

   $ (1   $ (10 )   $ 6      $ (10

Selling, general and administrative expenses

     (2     (2     (7     (5
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (3   $ (12   $ (1   $ (15
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value of Derivative Instruments

The fair value of foreign exchange forward and option contracts not designated as hedging instruments are included in the following consolidated balance sheet captions in the amounts shown:

 

(Dollars in Millions)

   March 30,
2012
     September 30,
2011
 

Derivative Assets:

     

Prepaid expenses and other current assets

   $ 17       $ 40   

Accrued and other current liabilities

     5         1   
  

 

 

    

 

 

 
   $ 22       $ 41   
  

 

 

    

 

 

 

Derivative Liabilities:

     

Prepaid expenses and other current assets

   $ 2       $ 5   

Accrued and other current liabilities

     15         24   
  

 

 

    

 

 

 
   $ 17       $ 29   
  

 

 

    

 

 

 

12. Financial Instruments and Fair Value Measurements

The following tables provide a summary of the significant assets and liabilities that are measured at fair value on a recurring basis at March 30, 2012 and September 30, 2011:

 

            Basis of Fair Value Measurement  

(Dollars in Millions)

   March 30,
2012
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Foreign currency contracts

   $ 22       $ —         $ 22       $ —     

Debt and equity securities held in rabbi trust

     35         18         17         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 57       $ 18       $ 39       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency contracts

   $ 17       $ —         $ 17       $ —     

Deferred compensation liabilities

     95         —           95         —     

Contingent consideration

     85         —           —           85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 197       $ —         $ 112       $ 85   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

            Basis of Fair Value Measurement  

(Dollars in Millions)

   September 30,
2011
     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Foreign currency contracts

   $ 41       $ —         $ 41       $ —     

Debt and equity securities held in rabbi trust

     33         15         18         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 74       $ 15       $ 59       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency contracts

   $ 29       $ —         $ 29       $ —     

Deferred compensation liabilities

     93         —           93         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ 122       $ —         $ 122       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency contracts—The fair values of foreign currency contracts were measured using significant other observable inputs and valued by reference to over-the-counter quoted market prices for similar instruments. The Company does not believe that the fair values of these derivative instruments materially differ from the amounts that could be realized upon settlement or maturity, or that the changes in fair value will have a material effect on its results of operations, financial condition or cash flows.

Debt and equity securities held in rabbi trust—Debt securities held in the rabbi trust consist primarily of U.S. government and agency securities and corporate bonds. Where quoted prices are available in an active market, the investments are classified as level 1. When quoted market prices for a security are not available in an active market, they are classified as level 2. Equity securities held in the rabbi trust primarily consist of U.S. common stocks, which are valued using quoted market prices reported on nationally recognized securities exchanges.

Deferred compensation liabilities—The Company maintains a non-qualified deferred compensation plan in the United States, which permits eligible employees to defer a portion of their compensation. A record keeping account is set up for each participant and the participant chooses from a variety of funds for the deemed investment of their accounts. The measurement funds generally correspond to the funds offered in the Company’s U.S. tax-qualified retirement plan and the account balance fluctuates with the investment returns on those funds.

Contingent consideration—As discussed in note 2, during the second quarter of fiscal 2012, the Company recorded contingent consideration of $71 million associated with the acquisition of BÂRRX. This contingent consideration, which could total $75 million, is based on the achievement of health insurance coverage targets for procedures utilizing BÂRRX devices. In addition, during the second quarter of fiscal 2012, the Company recorded contingent consideration of $13 million associated with another acquisition. This contingent consideration, which could total $20 million, is based on the achievement of sales targets. The fair values of the contingent consideration were measured based on the probability-weighted present value of the payments expected to be made.

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The fair values of contingent consideration are based on significant unobservable inputs, including management estimates and assumptions and, accordingly, have been classified as level 3 within the fair value hierarchy. These liabilities will be re-measured each reporting period and changes in the fair values will be included in selling, general and administrative expenses in the consolidated statements of income. Following is a reconciliation of changes in the fair value of contingent consideration for both the quarter and six months ended March 30, 2012:

 

(Dollars in Millions)

      

Fair value at September 30, 2011

   $ —     

Fair value of acquired liabilities

     84   

Changes in fair value

     1   
  

 

 

 

Fair value at March 30, 2012

   $ 85   
  

 

 

 

Financial Instruments Not Measured at Fair Value

The fair value of cash and cash equivalents approximate carrying value since cash equivalents consist of liquid investments with a maturity of three months or less (level 1). The fair value of restricted cash is equivalent to its carrying value of $53 million and $60 million as of March 30, 2012 and September 30, 2011, respectively (level 1). The Company’s life insurance contracts are carried at cash surrender value (level 3). The fair value of these contracts approximates the carrying value of $88 million at both March 30, 2012 and September 30, 2011. The fair value of long-term debt, including both current and non current maturities, is based upon quoted prices in active markets for similar instruments (level 2) and was approximately $4.904 billion and $4.781 billion at March 30, 2012 and September 30, 2011, respectively. It is not practicable to estimate the fair value of the Company’s guaranteed contingent tax liability and the related amounts due to or from former parent and affiliate.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, derivative financial instruments and accounts receivable. The Company invests its excess cash in deposits or money market funds and diversifies the concentration of cash among different financial institutions that have at least an A credit rating. Counterparties to the Company’s derivative financial instruments are limited to major financial institutions with at least a Moody’s and Standard & Poor’s long-term debt rating of A/A2. While the Company does not require collateral or other security to be furnished by the counterparties to its derivative financial instruments, it minimizes exposure to credit risk by dealing with a diversified group of major financial institutions and actively monitoring outstanding positions.

Concentrations of credit risk with respect to trade accounts receivable are generally limited due to the Company’s large number of customers and their diversity across many geographic areas. A portion of the Company’s trade accounts receivable outside the United States, however, include sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries’ national economies. Deteriorating credit and economic conditions in parts of Western Europe, particularly in Spain, Italy and Portugal, may continue to increase the average length of time it takes the Company to collect its accounts receivable in certain regions within these countries.

The Company continually evaluates all government receivables for potential collection risks associated with the availability of government funding and reimbursement practices. If the financial condition of customers or the countries’ healthcare systems continue to deteriorate such that their ability to make payments is uncertain, charges may be required in future periods.

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company’s aggregate accounts receivable, net of the allowance for doubtful accounts in Spain, Italy and Portugal and as a percent of the Company’s total accounts receivable at the end of each period are as follows:

 

(Dollars in Millions)

   March 30,
2012
    September 30,
2011
 

Accounts receivable, net in Spain, Italy and Portugal

   $ 698      $ 563   

Percentage of total accounts receivable, net

     37     32

Net sales to customers in Spain, Italy and Portugal totaled $176 million and $186 million during the quarters ended March 30, 2012 and March 25, 2011, respectively. Net sales to customers in Spain, Italy and Portugal totaled $336 million and $355 million during the six months ended March 30, 2012 and March 25, 2011, respectively.

13. Transactions with Former Parent and Affiliate

Separation and Distribution Agreement—On June 29, 2007, the Company entered into a Separation and Distribution Agreement with Tyco International and TE Connectivity. Under this agreement, subject to certain exceptions contained in the Tax Sharing Agreement, Covidien, Tyco International and TE Connectivity assumed 42%, 27% and 31%, respectively, of certain of Tyco International’s contingent and other corporate liabilities, primarily consolidated securities litigation and any actions with respect to the separation brought by any third party. These contingent and other corporate liabilities do not include liabilities that specifically relate to one of the three separated companies, which were allocated solely to the relevant company.

Tax Sharing Agreement—On June 29, 2007, the Company entered into a Tax Sharing Agreement, under which the Company shares responsibility for certain of its, Tyco International’s and TE Connectivity’s income tax liabilities for periods prior to the separation. Covidien, Tyco International and TE Connectivity share 42%, 27% and 31%, respectively, of U.S. income tax liabilities that arise from adjustments made by tax authorities to its, Tyco International’s and TE Connectivity’s U.S. income tax returns, certain income tax liabilities arising from adjustments made by tax authorities to intercompany transactions or similar adjustments, and certain taxes attributable to internal transactions undertaken in anticipation of the separation. All costs and expenses associated with the management of these tax liabilities are being shared equally among the parties. The Company is responsible for all of its own taxes that are not shared pursuant to the Tax Sharing Agreement.

All the tax liabilities of Tyco International that were associated with the Company’s business became Covidien’s tax liabilities following the separation. Although Covidien shares certain of these tax liabilities with Tyco International and TE Connectivity pursuant to the Tax Sharing Agreement, Covidien is primarily liable for all of these liabilities. Accordingly, if Tyco International and TE Connectivity default on their obligations to Covidien under the Tax Sharing Agreement, Covidien would be liable for the entire amount of these liabilities.

If any party to the Tax Sharing Agreement were to default in its obligation to another party to pay its share of the distribution taxes that arise as a result of no party’s fault, each non-defaulting party would be required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party to the Tax Sharing Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such liability to a taxing authority, the Company could be legally liable under applicable tax law for such liabilities and be required to make additional tax payments. Accordingly, under certain circumstances, the Company may be obligated to pay amounts in excess of the Company’s agreed upon share of its, Tyco International’s and TE Connectivity’s tax liabilities.

 

16


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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has used available information to develop its best estimates for certain assets and liabilities related to periods prior to separation, including amounts subject to or impacted by the provisions of the Tax Sharing Agreement. Although the Company believes its estimates are adequate, the outcome of any potential litigation is uncertain and could result in a significant increase to its liability for taxes arising prior to June 29, 2007. The actual amounts that Covidien may be required to ultimately accrue or pay under the Tax Sharing Agreement could vary depending upon the outcome of the unresolved tax matters, which may not occur for several years, especially if certain matters are litigated. Final determination of the balances will be made in subsequent periods, primarily related to certain pre-separation tax liabilities and tax years open for examination. These balances will also be impacted by the filing of final or amended income tax returns in certain jurisdictions where those returns include a combination of Tyco International, Covidien and/or TE Connectivity legal entities for periods prior to the separation.

At March 30, 2012, the Company is the primary obligor to the taxing authorities for $1.660 billion of contingent tax liabilities that are recorded on the consolidated balance sheet, of which $1.091 billion relates to periods prior to the separation and which is shared with Tyco International and TE Connectivity pursuant to the Tax Sharing Agreement. At September 30, 2011, the Company was the primary obligor to the taxing authorities for $1.631 billion of contingent tax liabilities that were recorded on the consolidated balance sheet.

Income Tax Receivables—The Company has a current and non-current net receivable from Tyco International and TE Connectivity totaling $587 million at both March 30, 2012 and September 30, 2011, respectively. These receivables, which reflect 58% of the contingent tax liabilities that are subject to the Tax Sharing Agreement, are classified as due from former parent and affiliate on the consolidated balance sheets. Adjustments to these receivables are recorded in other income. During the first six months of fiscal 2012, the Company received a net reimbursement payment totaling $9 million from Tyco International and TE Connectivity.

Guaranteed Contingent Tax Liabilities—The Company has certain guarantee commitments and indemnifications with Tyco International and TE Connectivity, primarily related to certain contingent tax liabilities. Current and non-current liabilities totaling $626 million and $660 million related to these guarantees were included on the Company’s consolidated balance sheet at March 30, 2012 and September 30, 2011, respectively. During the first six months of fiscal 2012, the Company made payments totaling $34 million to Tyco International and TE Connectivity, which represents the 42% reimbursement required pursuant to the Tax Sharing Agreement for applicable tax and interest payments made by Tyco International and TE Connectivity.

14. Commitments and Contingencies

The Company is subject to various legal proceedings and claims, including patent infringement claims, product liability matters, environmental matters, employment disputes, disputes on agreements and other commercial disputes. Management believes that these legal proceedings and claims likely will be resolved over an extended period of time. Although it is not feasible to predict the outcome of these proceedings, based upon the Company’s experience, current information and applicable law, management does not expect that these proceedings will have a material adverse effect on the Company’s financial condition. However, one or more of the proceedings could have a material adverse effect on the Company’s results of operations or cash flows for a future period. The most significant of these matters are discussed below.

Products Liability Litigation

The Company currently is involved in litigation in various state and federal courts against manufacturers of transvaginal pelvic mesh products alleging personal injuries resulting from the implantation of those products. Two subsidiaries of the Company have supplied pelvic mesh product to one of the manufacturers named in the litigation and the Company is indemnifying that manufacturer on certain claims. The litigation includes a federal

 

17


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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

multi-district litigation in the United States District Court for the Northern District of West Virginia and cases in various state courts. Generally, complaints allege design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. The Company believes that it has meritorious defenses to these claims and is vigorously defending against them. As of March 30, 2012, there were approximately 360 cases pending believed to involve products manufactured by Company subsidiaries. During fiscal 2011, the Company recorded a charge of $46 million for all known pending and estimated future claims, net of anticipated insurance recoveries. During the first six months of fiscal 2012, the Company continued to receive claims and used the claims data to update its estimate of future claims. Accordingly, the Company recorded an additional charge of $47 million, which is included in selling, general and administrative expenses. The liability and insurance receivable are included in other liabilities and other assets, respectively, on the consolidated balance sheets. The Company believes that it has adequate amounts recorded relating to these matters based on current information. While the Company believes that the final disposition of all known claims, after taking into account amounts already accrued and insurance coverage, will not have a material adverse effect on the Company’s results of operations, financial condition or cash flows, it is not possible at this time to determine with certainty the ultimate outcome of these matters or the effect of potential future claims.

Asbestos Matters

Mallinckrodt Inc. is named as a defendant in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims, based principally on allegations of past distribution of products incorporating asbestos. A very limited number of the cases allege premises liability, based on claims that individuals were exposed to asbestos while on Mallinckrodt’s property. Each case typically names dozens of corporate defendants in addition to Mallinckrodt. The complaints generally seek monetary damages for personal injury or bodily injury resulting from alleged exposure to products containing asbestos.

The Company’s involvement in asbestos cases has been limited because Mallinckrodt did not mine or produce asbestos. Furthermore, in the Company’s experience, a large percentage of these claims have never been substantiated and have been dismissed by the courts. The Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims, and intends to continue to vigorously defend these lawsuits. When appropriate, the Company settles claims; however, amounts paid to settle and defend all asbestos claims have been immaterial. As of March 30, 2012, there were approximately 11,500 asbestos liability cases pending against Mallinckrodt.

The Company estimates pending asbestos claims and claims that were incurred but not reported, as well as related insurance recoveries. The Company’s estimate of its liability for pending and future claims is based on claims experience over the past five years and covers claims either currently filed or expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes that the final outcome of all known and anticipated future claims, after taking into account amounts already accrued and insurance coverage, will not have a material adverse effect on its results of operations, financial condition or cash flows.

Environmental Proceedings

The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of site cleanup and timing of future cash flows is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. As of March 30, 2012, the Company concluded that it was probable that it would incur remedial costs in the range of $176 million to $295 million. As of March 30, 2012, the Company concluded that the best estimate within this range was $176 million, of which $24

 

18


Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

million was included in accrued and other current liabilities and $152 million was included in other liabilities on the consolidated balance sheet. The most significant of these liabilities pertains to a site in Orrington, Maine, which is discussed below. The Company believes that any potential payment of such estimated amounts will not have a material adverse effect on its results of operations, financial condition or cash flows.

Mallinckrodt LLC, a subsidiary of the Company, is a successor to a company which owned and operated a chemical manufacturing facility in Orrington, Maine from 1967 until 1982. Mallinckrodt is responsible for the costs of completing an environmental site investigation required by the United States Environmental Protection Agency (EPA) and the Maine Department of Environmental Protection (MDEP). Based on the site investigation, Mallinckrodt submitted a Corrective Measures Study plan and identified a preferred alternative which was submitted to the EPA and MDEP for approval in 2004. MDEP disagreed with the proposed alternative and served a compliance order on Mallinckrodt LLC (now known as Mallinckrodt US LLC) and United States Surgical Corporation in December 2008. The compliance order included a directive to remove a significant volume of soils at the site. On December 19, 2008, Mallinckrodt filed an appeal with the Maine Board of Environmental Protection (Maine Board) to challenge the terms of the compliance order. A hearing before the Maine Board began on January 25, 2010 and concluded on February 4, 2010. On August 19, 2010, the Maine Board modified the MDEP order and issued a final order requiring removal of two landfills, capping of the remaining three landfills, installation of a groundwater extraction system and long-term monitoring of the site and the three remaining landfills.

On September 17, 2010, Mallinckrodt appealed the final order issued by the Maine Board in Maine Superior Court. On appeal Mallinckrodt has requested that the Superior Court invalidate the Maine Board’s final order in its entirety or in the alternative, reverse or modify the final order to eliminate the requirements that Mallinckrodt remove one of the two landfills and recap the remaining three landfills. Mallinckrodt also appealed certain administrative requirements of the final order. The Company has assessed the status of this matter and has concluded that it is more likely than not that the Maine Board’s final order will be either invalidated, reversed or modified, and, further, intends to vigorously pursue all available means to achieve such result.

As of March 30, 2012, the Company estimates that the cost to comply with these proposed remediation alternatives at this site ranges from $94 million to $168 million. These amounts are included in the range of aggregate environmental remediation costs described above. However, there are still significant uncertainties in the outcome of the pending litigation, and the Company continues to disagree with the level of remediation outlined in the Maine Board’s final order.

The Company has also recorded asset retirement obligations (AROs) for the estimated future costs primarily associated with legal obligations to decommission two facilities within the Pharmaceuticals segment. At both March 30, 2012 and September 30, 2011, the Company’s AROs were $53 million. The Company believes that any potential payment of such estimated amounts will not have a material adverse effect on its results of operations, financial condition or cash flows.

Other Matters

The Company is a defendant in a number of other pending legal proceedings incidental to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its results of operations, financial condition or cash flows.

Tyco International Legal Proceedings

As discussed in note 13, pursuant to the Separation and Distribution Agreement, the Company assumed a portion of Tyco International’s contingent and other corporate liabilities, including potential liabilities related to certain of

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Tyco International’s outstanding litigation matters. As of March 25, 2011, there were no remaining securities lawsuits outstanding. Accordingly, during the first six months of fiscal 2011, the Company recorded income of $11 million related to the reversal of its portion of the remaining reserves that had previously been established.

Compliance Matters

Prior to the separation from Tyco International, Tyco International received and responded to various allegations that certain improper payments were made by Tyco International subsidiaries, including subsidiaries which are now part of the Company. During 2005, Tyco International reported to the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) the investigative steps and remedial measures that it had taken in response to the allegations. Tyco International also informed the DOJ and the SEC that it retained outside counsel to perform a company-wide baseline review of its policies, controls and practices with respect to compliance with the Foreign Corrupt Practices Act (FCPA), that it would continue to make periodic progress reports to these agencies and that it would present its factual findings upon conclusion of the baseline review. The Company has continued to communicate with the DOJ and SEC to provide updates on the baseline review and follow-up investigations, including, as appropriate, briefings concerning additional instances of potential improper conduct identified by the Company in the course of its ongoing compliance activities. To date, the baseline review and other compliance reviews have revealed that some past business practices may not comply with Covidien and FCPA requirements. The Company believes that it has adequate amounts recorded related to these matters, the amount of which is not significant.

Income Taxes

The income tax returns of the Company and its subsidiaries are periodically examined by various tax authorities. The U.S. Internal Revenue Service (IRS) continues to audit the Company’s U.S. federal income tax returns for the years 2008 and 2009. Open periods for examination also include certain periods during which the Company was a subsidiary of Tyco International. The resolution of these matters is subject to the conditions set forth in the Tax Sharing Agreement. Tyco International has the right to administer, control and settle all U.S. income tax audits for periods prior to the separation. The Company has potential liabilities related to these income tax returns and has included its best estimate of potential liabilities for these years within the current and non-current income taxes payable. With respect to these potential income tax liabilities from all of these years, Covidien believes that the amounts recorded in its consolidated financial statements as current or non-current income taxes payable are adequate.

The IRS has concluded its field examination of certain of Tyco International’s U.S. federal income tax returns for the years 1997 through 2000 and proposed tax adjustments, several of which also affect Covidien’s income tax returns for years after 2000. Tyco International has appealed certain of the tax adjustments proposed by the IRS and Covidien believes that some of these adjustments relating to certain Tyco International subsidiaries are likely to be resolved within the next 12 months. With respect to other adjustments, Tyco International has indicated that settlement is unlikely. In the event that Tyco International is unable to resolve these issues in the IRS administrative process, Tyco International will likely contest certain adjustments related to disallowed deductions through litigation. While Covidien believes that the amounts recorded as non-current taxes payable or guaranteed contingent tax liabilities related to these adjustments are adequate, the timing and outcome of such litigation is highly uncertain and could have a significant effect on the consolidated financial statements.

The IRS continues to audit certain of Tyco International’s U.S. federal income tax returns for the years 2001 through 2004 and 2005 through 2007 audit cycles. Tyco International and the IRS have entered into settlements related to certain outstanding tax matters arising in the 2001 through 2004 U.S. audit cycle, which otherwise remains open and subject to examination and resolution of other matters.

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The resolution of tax matters arising from the 1997 through 2007 U.S. audits, non-U.S. audits and other settlements or statute of limitations expirations, could result in a significant change in the Company’s unrecognized tax benefits. However, the Company does not expect that the total amount of unrecognized tax benefits will significantly change over the next 12 months.

15. Segment Data

The Company’s three reportable segments are as follows:

 

   

Medical Devices includes the development, manufacture and sale of endomechanical instruments, energy devices, soft tissue repair products, vascular products, oximetry and monitoring products, airway and ventilation products and other medical products.

 

   

Pharmaceuticals includes the development, manufacture and distribution of specialty pharmaceuticals, active pharmaceutical ingredients, contrast products and radiopharmaceuticals.

 

   

Medical Supplies includes the development, manufacture and sale of nursing care products, medical surgical products, SharpSafety products and original equipment manufacturer products (OEM).

The Company has aggregated the following five operating segments into the Medical Devices reportable segment based upon their similar operational and economic characteristics: General Surgery in the United States and Europe, Vascular in the United States and Europe, Respiratory & Monitoring Solutions in the United States and Europe, Developed Markets (Canada, Japan, Australia and New Zealand) and Emerging Markets (Latin America, Asia, Eastern Europe, the Middle East and Africa).

Selected information by business segment is as follows:

 

    Quarters Ended     Six Months Ended  

(Dollars in Millions)

  March 30,
2012
    March 25,
2011
    March 30,
2012
    March 25,
2011
 

Net sales(1) :

       

Medical Devices

  $ 2,004      $ 1,877      $ 3,988      $ 3,754   

Pharmaceuticals

    508        490        998        960   

Medical Supplies

    434        434        858        856   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,946      $ 2,801      $ 5,844      $ 5,570   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

       

Medical Devices

  $ 609      $ 582      $ 1,262      $ 1,164   

Pharmaceuticals

    92        86        175        157   

Medical Supplies

    47        59        102        122   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income of reportable segments

    748        727        1,539        1,443   

Unallocated amounts:

       

Corporate expenses

    (96     (106     (182     (207

Legal charges (note 14)

    —          —          (47     —     

Restructuring and related (charges) credits, net (note 3)

    (21     2        (39     (51

Separation costs(2)

    (6     —          (10     —     

Charges associated with acquisitions and licensing arrangement(3)

    (16     (8     (16     (32

Shareholder settlement income

    —          —          —          11   
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

  $ 609      $ 615      $ 1,245      $ 1,164   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts represent sales to external customers. Intersegment sales are not significant.

(2) 

Amounts represent costs incurred related to the separation of the Company’s Pharmaceuticals segment.

(3) 

Current period amounts primarily relate to an upfront payment made in connection with a license agreement, which is discussed in note 2. Prior year amounts represent charges included in cost of goods sold related to the sale of acquired inventory that had been written up to fair value upon acquisition.

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

16. Covidien International Finance S.A.

CIFSA, a Luxembourg company, is a holding company that owns, directly or indirectly, substantially all of the operating subsidiaries of Covidien plc. CIFSA is the issuer of the Company’s senior notes and commercial paper, both of which are fully and unconditionally guaranteed by Covidien plc and Covidien Ltd., the owners of CIFSA. In addition, CIFSA is the borrower under the revolving credit facility, which is fully and unconditionally guaranteed by Covidien plc. The following information provides the composition of the Company’s income, assets, liabilities, equity and cash flows by relevant group within the Company: Covidien plc and Covidien Ltd. as the guarantors, CIFSA as issuer of the debt and the operating companies that represent assets of CIFSA. There are no other subsidiary guarantees. Condensed consolidating financial information for Covidien plc, Covidien Ltd. and CIFSA, on a stand-alone basis, is presented using the equity method of accounting for subsidiaries.

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Quarter Ended March 30, 2012

(dollars in millions)

 

     Covidien plc     Covidien Ltd.     CIFSA     Other
Subsidiaries
    Consolidating
Adjustments
    Total  

Net sales

   $ —        $ —        $ —        $ 2,946      $ —        $ 2,946   

Cost of goods sold

     —          —          —          1,240        —          1,240   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          —          1,706        —          1,706   

Selling, general and administrative expenses

     45        —          —          869        —          914   

Research and development expenses

     —          —          —          167        —          167   

Restructuring charges, net

     —          —          —          16        —          16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (45     —          —          654        —          609   

Interest expense

     —          —          (52     1       —          (51

Interest income

     —          —          —          6        —          6   

Other income

     —          —          —          4        —          4   

Equity in net income of subsidiaries

     590        592        480        —          (1,662     —     

Intercompany interest and fees

     (50     (2     164        (112     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     495        590        592        553        (1,662     568   

Income tax (benefit) expense

     (2     —          —          79        —          77   

Income from continuing operations

     497        590        592        474        (1,662     491   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations, net of income taxes

     —          —          —          6        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 497      $ 590      $ 592      $ 480      $ (1,662   $ 497   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Quarter Ended March 25, 2011

(dollars in millions)

 

     Covidien plc     Covidien Ltd.     CIFSA     Other
Subsidiaries
    Consolidating
Adjustments
    Total  

Net sales

   $ —        $ —        $ —        $ 2,801      $ —        $ 2,801   

Cost of goods sold

     —          —          —          1,205        —          1,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          —          1,596        —          1,596   

Selling, general and administrative expenses

     4        —          1       848        —          853   

Research and development expenses

     —          —          —          130        —          130   

Restructuring credits, net

     —          —          —          (2     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (4     —          (1 )     620        —          615   

Interest expense

     —          —          (52     2       —          (50

Interest income

     —          —          —          6        —          6   

Other expense, net

     —          —          —          (1     —          (1

Equity in net income of subsidiaries

     474        475        369        —          (1,318     —     

Intercompany interest and fees

     (24     (1     159        (134     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     446        474        475        493        (1,318     570   

Income tax (benefit) expense

     (9     —          —          120        —          111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     455        474        475        373        (1,318     459   

Loss from discontinued operations, net of income taxes

     —          —          —          (4     —          (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 455      $ 474      $ 475      $ 369      $ (1,318   $ 455   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


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COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Six Months Ended March 30, 2012

(dollars in millions)

 

     Covidien plc     Covidien Ltd.     CIFSA     Other
Subsidiaries
    Consolidating
Adjustments
    Total  

Net sales

   $ —        $ —        $ —        $ 5,844      $ —        $ 5,844   

Cost of goods sold

     —          —          —          2,437        —          2,437   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          —          3,407        —          3,407   

Selling, general and administrative expenses

     48        —          1        1,772        —          1,821   

Research and development expenses

     —          —          —          311        —          311   

Restructuring charges, net

     —          —          —          30        —          30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (48     —          (1     1,294        —          1,245   

Interest expense

     —          —          (103     1       —          (102

Interest income

     —          —          —          12        —          12   

Other income

     —          —          —          6        —          6   

Equity in net income of subsidiaries

     1,098        1,101        880        —          (3,079     —     

Intercompany interest and fees

     (63     (3     325        (259     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     987        1,098        1,101        1,054        (3,079     1,161   

Income tax (benefit) expense

     (4     —          —          180        —          176   

Income from continuing operations

     991        1,098        1,101        874        (3,079     985   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations, net of income taxes

     —          —          —          6        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 991      $ 1,098      $ 1,101      $ 880      $ (3,079   $ 991   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Six Months Ended March 25, 2011

(dollars in millions)

 

     Covidien plc     Covidien Ltd.     CIFSA     Other
Subsidiaries
    Consolidating
Adjustments
    Total  

Net sales

   $ —        $ —        $ —        $ 5,570      $ —        $ 5,570   

Cost of goods sold

     —          —          —          2,403        —          2,403   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          —          —          3,167        —          3,167   

Selling, general and administrative expenses

     7        —          1       1,706        —          1,714   

Research and development expenses

     —          —          —          249        —          249   

Restructuring charges, net

     —          —          —          51        —          51   

Shareholder settlement income

     —          —          —          (11     —          (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (7     —          (1 )     1,172        —          1,164   

Interest expense

     —          —          (104     2        —          (102

Interest income

     —          —          —          11        —          11   

Other income, net

     —          —          —          12        —          12   

Equity in net income of subsidiaries

     941        943        732        —          (2,616     —     

Intercompany interest and fees

     (61     (2     316        (253     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     873        941        943        944        (2,616     1,085   

Income tax (benefit) expense

     (9     —          —          203        —          194   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     882        941        943        741        (2,616     891   

Loss from discontinued operations, net of income taxes

     —          —          —          (9     —          (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 882      $ 941      $ 943      $ 732      $ (2,616   $ 882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

At March 30, 2012

(dollars in millions)

 

    Covidien plc     Covidien Ltd.     CIFSA     Other
Subsidiaries
    Consolidating
Adjustments
    Total  

Assets

           

Current Assets:

           

Cash and cash equivalents

  $ 1      $ —        $ 237      $ 1,425      $ —        $ 1,663   

Accounts receivable trade, net

    —          —          —          1,874        —          1,874   

Inventories

    —          —          —          1,640        —          1,640   

Intercompany receivable

    27        51        —          17        (95     —     

Prepaid expenses and other current assets

    3        —          —          902        —          905   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    31        51        237        5,858        (95     6,082   

Property, plant and equipment, net

    2        —          —          2,767        —          2,769   

Goodwill

    —          —          —          7,961        —          7,961   

Intangible assets, net

    —          —          —          2,836        —          2,836   

Due from former parent and affiliate

    —          —          —          589        —          589   

Investment in subsidiaries

    12,932        13,554        10,772        —          (37,258     —     

Intercompany loans receivable

    —          93        11,842        4,971        (16,906     —     

Other assets

    —          —          21        896        —          917   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 12,965      $ 13,698      $ 22,872      $ 25,878      $ (54,259   $ 21,154   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

           

Current Liabilities:

           

Current maturities of long-term debt

  $ —        $ —        $ 503      $ 8      $ —        $ 511   

Accounts payable

    5        —          —          586        —          591   

Intercompany payable

    17        —          —          78        (95     —     

Accrued and other current liabilities

    109        —          84        1,269        —          1,462   

Income taxes payable

    —          —          —          50        —          50   

Guaranteed contingent tax liabilities

    —          —          —          29        —          29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    131        —          587        2,020        (95     2,643   

Long-term debt

    —          —          3,760        64        —          3,824   

Income taxes payable

    —          —          —          1,660        —          1,660   

Guaranteed contingent tax liabilities

    —          —          —          597        —          597   

Intercompany loans payable

    2,302        766        4,971        8,867        (16,906     —     

Other liabilities

    1        —          —          1,898        —          1,899   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

    2,434        766        9,318        15,106        (17,001     10,623   

Shareholders’ Equity

    10,531        12,932        13,554        10,772        (37,258     10,531   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

  $ 12,965      $ 13,698      $ 22,872      $ 25,878      $ (54,259   $ 21,154   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

At September 30, 2011

(dollars in millions)

 

    Covidien plc     Covidien Ltd.     CIFSA     Other
Subsidiaries
    Consolidating
Adjustments
    Total  

Assets

           

Current Assets:

           

Cash and cash equivalents

  $ —        $ —        $ 169      $ 1,334      $ —        $ 1,503   

Accounts receivable trade, net

    —          —          —          1,744        —          1,744   

Inventories

    —          —          —          1,513        —          1,513   

Intercompany receivable

    23        —          —          153        (176     —     

Prepaid expenses and other current assets

    3        —          29        981        —          1,013   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    26        —          198        5,725        (176     5,773   

Property, plant and equipment, net

    2        —          —          2,703        —          2,705   

Goodwill

    —          —          —          7,683        —          7,683   

Intangible assets, net

    —          —          —          2,764        —          2,764   

Due from former parent and affiliate

    —          —          —          583        —          583   

Investment in subsidiaries

    11,860        12,478        11,340        —          (35,678     —     

Intercompany loans receivable

    —          94        11,294        6,160        (17,548     —     

Other assets

    —          —          22        844        —          866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 11,888      $ 12,572      $ 22,854      $ 26,462      $ (53,402   $ 20,374   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

           

Current Liabilities:

           

Current maturities of long-term debt

  $ —        $ —        $ 3      $ 8      $ —        $ 11   

Accounts payable

    —          —          —          576        —          576   

Intercompany payable

    24        129        —          23        (176     —     

Accrued and other current liabilities

    109        —          83        1,419        —          1,611   

Income taxes payable

    —          —          —          97        —          97   

Guaranteed contingent tax liabilities

    —          —          —          105        —          105   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    133        129        86        2,228        (176     2,400   

Long-term debt

    —          —          4,129        68        —          4,197   

Income taxes payable

    —          —          —          1,629        —          1,629   

Guaranteed contingent tax liabilities

    —          —          —          555        —          555   

Intercompany loans payable

    1,937        583        6,161        8,867        (17,548     —     

Other liabilities

    1        —          —          1,775        —          1,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

    2,071        712        10,376        15,122        (17,724     10,557   

Shareholders’ Equity

    9,817        11,860        12,478        11,340        (35,678     9,817   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

  $ 11,888      $ 12,572      $ 22,854      $ 26,462      $ (53,402   $ 20,374   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended March 30, 2012

(dollars in millions)

 

     Covidien plc     Covidien Ltd.     CIFSA     Other
Subsidiaries
    Consolidating
Adjustments
    Total  

Cash Flows From Operating Activities:

            

Net cash (used in) provided by operating activities

   $ (77   $ (183   $ 253      $ 923      $ —        $ 916   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities:

            

Capital expenditures

     —          —          —          (250     —          (250

Acquisition-related payments, net of cash acquired

     —          —          —          (352     —          (352

Sale of investments

     —          —          —          3        —          3   

Net increase in intercompany loans

     —          —          (1,737     —          1,737        —     

Increase in investment in subsidiary

     —          —          (285     —          285        —     

Other

     —          —          —          2        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          —          (2,022     (597     2,022        (597
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

            

Net issuance of commercial paper

     —          —          132        —          —          132   

Repayment of debt

     —          —          —          (3     —          (3

Dividends paid

     (217     —          —          —          —          (217

Repurchase of shares

     (158     —          —          —          —          (158

Proceeds from exercise of share options

     81        —          —          —          —          81   

Net intercompany loan borrowings

     365        183        —          1,189        (1,737     —     

Intercompany dividend received (paid)

     —          —          1,705        (1,705     —          —     

Capital contribution

     —          —          —          285        (285 )     —     

Other

     7        —          —          6        —          13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     78        183        1,837        (228     (2,022     (152
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of currency rate changes on cash

     —          —          —          (7     —          (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1        —          68        91        —          160   

Cash and cash equivalents at beginning of period

     —          —          169        1,334        —          1,503   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1      $ —        $ 237      $ 1,425      $ —        $ 1,663   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

COVIDIEN PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended March 25, 2011

(dollars in millions)

 

     Covidien plc     Covidien Ltd.     CIFSA     Other
Subsidiaries
    Consolidating
Adjustments
    Total  

Cash Flows From Operating Activities:

            

Net cash (used in) provided by operating activities

   $ (9   $ (1 )   $ 210      $ 699      $ —        $ 899   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities:

            

Capital expenditures

     —          —          —          (167     —          (167

Sale of investments

     —          —          —          14       —          14  

Net increase in intercompany loans

     —          —          (373     —          373        —     

Other

     —          —          —          (6     —          (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —          —          (373     (159     373        (159
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

            

Net repayment of commercial paper

     —          —          (215     —          —          (215

Repayment of debt

     —          —          (250     (4     —          (254

Dividends paid

     (198     —          —          —          —          (198

Repurchase of shares

     (102     —          —          —          —          (102

Proceeds from exercise of share options

     73        —          —          —          —          73   

Net intercompany loan borrowings

     203        1       —          169        (373     —     

Intercompany dividend received (paid)

     —          —          490        (490     —          —     

Other

     33        —          —          (29     —          4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     9        1       25        (354     (373     (692
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of currency rate changes on cash

     —          —          —          16        —          16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     —          —          (138     202        —          64   

Cash and cash equivalents at beginning of period

     1        —          399        1,165        —          1,565   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1     $ —        $ 261      $ 1,367      $ —        $ 1,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included in this Quarterly Report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed under the headings “Risk Factors” and “Forward-Looking Statements” in both our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 and in this Quarterly Report.

Overview

We develop, manufacture and sell healthcare products for use in clinical and home settings. Our mission is to create and deliver innovative healthcare solutions, developed in ethical collaboration with medical professionals, which enhance the quality of life for patients and improve outcomes for our customers and our shareholders. We manage and operate our business through the following three segments:

 

   

Medical Devices includes the development, manufacture and sale of endomechanical instruments, energy devices, soft tissue repair products, vascular products, oximetry and monitoring products, airway and ventilation products, and other medical products.

 

   

Pharmaceuticals includes the development, manufacture and distribution of specialty pharmaceuticals, active pharmaceutical ingredients, contrast products and radiopharmaceuticals.

 

   

Medical Supplies includes the development, manufacture and sale of nursing care products, medical surgical products, SharpSafety products and original equipment manufacturer (OEM) products.

Separation

In December 2011, we announced a plan to spin off our pharmaceuticals business into a stand-alone public company. We anticipate that the transaction will be in the form of a distribution that will be tax-free to U.S. shareholders of a new publicly traded stock in the new pharmaceuticals company. Completion of the transaction is expected to be subject to certain conditions, including, among others, receipt of regulatory approvals, assurance as to the tax-free status of the spin-off of the pharmaceuticals business to our U.S. shareholders, the effectiveness of a Form 10 registration statement to be filed with the U.S. Securities and Exchange Commission and final approval by our Board of Directors. We currently expect that completion of the transaction could take up to 18 months; however, there can be no assurance regarding the ultimate timing of the proposed transaction or that the transaction will be completed.

Healthcare Reform

In March 2010, the Patient Protection and Affordable Care Act was enacted in the United States. This legislation includes a provision that imposes a 2.3% excise tax on the sale of certain medical devices by a manufacturer, producer or importer of such devices in the United States starting after December 31, 2012. The legislation also includes a $28 billion fee on the branded pharmaceutical industry over nine years starting in 2011 and a $2.8 billion annual fee on branded pharmaceuticals thereafter. The amount of branded pharmaceutical fee payable by each company is based upon market share. Since our branded pharmaceutical sales currently represent a small portion of the total market, this annual assessment has not had a significant impact on Covidien. The medical devices tax, however, may have a significant impact on our results of operations. While we are waiting for further regulations to be established, we continue to evaluate the potential impact that this tax may have on our overall business. U.S. net sales of potentially taxable medical devices represented approximately 30% to 40% of our total net sales in fiscal 2011 and, therefore, this tax burden may have a material, negative impact on our results of operations and our cash flows. In addition to the excise tax and annual fee described above, the new legislation contains numerous other provisions, many of which pertain to health insurance plans, which could adversely impact our financial results in future periods.

 

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Table of Contents

Acquisitions

On January 5, 2012, we acquired BÂRRX Medical, Inc. (BÂRRX), a developer of bipolar radiofrequency ablation devices used in the treatment of Barrett’s esophagus syndrome, for total considerations of $393 million. The total purchase consideration was comprised of an upfront cash payment of $322 million, net of cash acquired of $16 million, and the fair value of contingent consideration of $71 million. The contingent consideration, which could total $75 million, consists of a milestone payment related to the achievement of health insurance coverage targets for procedures utilizing BÂRRX devices. The acquisition of BÂRRX expands our ability to treat gastrointestinal diseases.

In April 2012, we acquired Maya Medical, a developer of a treatment for hypertension, for an upfront cash payment of $60 million. We may be required to pay up to an additional $170 million if certain regulatory and sales milestones are achieved.

In May 2012, we acquired Newport Medical, a designer and manufacturer of ventilators, for approximately $108 million in cash. The acquisition of Newport Medical complements our existing portfolio of acute care and home care ventilation solutions and broadens our ventilation platforms.

In March 2012, we entered into a definitive agreement to acquire superDimension, Ltd., a developer of minimally invasive interventional pulmonology devices, for approximately $300 million in cash, with possible future earnout payments of up to $50 million based on the achievement of specific milestones. The acquisition of superDimension will allow Covidien to deliver more comprehensive solutions in the evaluation and treatment of lung disease. The transaction is subject to customary closing conditions, including receipt of certain regulatory approvals, and is expected to be completed during the third quarter of fiscal 2012.

In April 2012, we entered into a definitive agreement to acquire Oridion Systems Ltd. (Oridion), a developer of patient monitoring systems, for approximately $300 million in cash, net of cash acquired. The acquisition of Oridion complements our existing product portfolio of pulse oximeters and monitoring products. The transaction is subject to the approval of Oridion’s shareholders and customary closing conditions, including receipt of certain regulatory approvals. The transaction is expected to be completed during the third quarter of fiscal 2012.

Licensing Agreement

During the second quarter of fiscal 2012, our Medical Devices segment entered into an exclusive licensing agreement which grants us product rights for two medical device patent and product candidates that are designed to remove peripheral artery blockages. This licensing arrangement included an upfront cash payment of $12 million, which was included in research and development expenses. In addition, during the second quarter of fiscal 2012, we made a regulatory milestone payment of $5 million, which was capitalized as an intangible asset. We may also be required to make additional payments of up to $60 million if certain regulatory and sales milestones are achieved.

Restructuring Initiatives

In fiscal 2011, we launched a restructuring program, designed to improve our cost structure. This program includes actions across all three segments as well as corporate. We expect to incur total charges of approximately $275 million as the specific actions required to execute on these initiatives are identified and approved, most of which are expected to be incurred by the end of fiscal 2014. Savings from this program are estimated to be $175 million to $225 million on an annualized basis once the program is completed. As of March 30, 2012, we had incurred $77 million of net restructuring charges under the 2011 program since its inception.

 

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Table of Contents

Results of Operations

Quarters and Six Months Ended March 30, 2012 and March 25, 2011

The following table presents results of operations, including percentage of net sales:

 

     Quarters Ended     Six Months Ended  

(Dollars in Millions)

   March 30, 2012     March 25, 2011     March 30, 2012     March 25, 2011  

Net sales

   $ 2,946        100.0   $ 2,801        100.0   $ 5,844        100.0   $ 5,570        100.0

Cost of goods sold

     1,240        42.1        1,205        43.0        2,437        41.7        2,403        43.1   
  

 

 

     

 

 

     

 

 

     

 

 

   

Gross profit

     1,706        57.9        1,596        57.0        3,407        58.3        3,167        56.9   

Selling, general and administrative expenses

     914        31.0        853        30.5        1,821        31.2        1,714        30.8   

Research and development expenses