Covidien plc (NYSE: COV) today reported results for the first quarter of fiscal 2013 (October - December 2012). First-quarter net sales of $3.06 billion were 5% above the $2.90 billion reported in the comparable period a year ago. Foreign exchange rate movement lowered the quarterly sales growth rate by one percentage point.
“In our large Medical Devices segment, we continued to generate above-market growth in a number of key categories, including stapling, energy, airway and ventilation. We delivered very strong growth in emerging markets, as we realized the benefits of our recent substantial investments in these fast-growing regions.”
First-quarter 2013 gross margin of 57.5% declined 1.2 percentage points from the 58.7% of the prior-year period. On an adjusted basis, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, first-quarter 2013 gross margin of 57.5% was 1.3 percentage points below that of a year ago. The decline was largely due to unfavorable foreign exchange rate movement, partially offset by positive business mix and productivity improvements.
Selling, general and administrative expenses (SG&A) for the first quarter of 2013 were above those of the same period of the year before, reflecting expenses associated with recent acquisitions, as well as spending on growth initiatives, including investments to expand the Company's presence in emerging markets. Research and development (R&D) expense in the first quarter of 2013 represented 4.9% of net sales, versus 5.0% of sales in the first quarter of 2012.
In the first quarter of 2013, the Company reported operating income of $658 million, versus $636 million in the same period the year before. First-quarter 2013 adjusted operating income, excluding specified items on the attached table, was $686 million, compared with $705 million in the prior year. First-quarter 2013 adjusted operating income, excluding the specified items, represented 22.4% of sales, versus 24.3% of sales in the year-ago period.
The first-quarter 2013 effective tax rate was 19.2%, versus an effective tax rate of 16.7% in the first quarter of 2012. The first-quarter 2013 adjusted tax rate, excluding specified items on the attached table, was 18.0%, versus 17.4% in the first quarter last year.
Diluted GAAP earnings per share were $1.03 in the first quarter of 2013, versus $1.02 per share in the comparable quarter of 2012. First-quarter 2013 adjusted diluted earnings per share, excluding specified items on the attached table, were $1.10, versus $1.13 a year earlier.
"We're off to a very good start in fiscal 2013, with first-quarter results exceeding our expectations," said José E. Almeida, Chairman, President and CEO. "In our large Medical Devices segment, we continued to generate above-market growth in a number of key categories, including stapling, energy, airway and ventilation. We delivered very strong growth in emerging markets, as we realized the benefits of our recent substantial investments in these fast-growing regions.
"As a result of our strong performance in the first quarter, coupled with the recent U.S. FDA approval of generic CONCERTA® extended-release (ER) tablets, we are raising our revenue guidance for fiscal 2013," Mr. Almeida added. "For the remainder of the year, we plan to make incremental growth-driving investments in R&D and SG&A that should enhance our future growth. We remain confident that our robust pipeline of new products, sizable expansion opportunities in emerging markets and recent promising portfolio additions will enable us to meet the significant challenges of the global marketplace and to continue to deliver good operational growth."
BUSINESS SEGMENT RESULTS
Medical Devices sales of $2.13 billion in the first quarter were 8% higher than the $1.98 billion in the comparable quarter of last year. Operational sales growth was 9%, as foreign exchange rate movement reduced the quarterly sales growth rate by one percentage point. Operationally, first-quarter sales in Endomechanical were well above those of a year ago, paced by double-digit gains for stapling that were led by our innovative Tri-Staple™ reloads. In Soft Tissue Repair, sales growth reflected an increase for suture, mesh and mechanical fixation products. Energy registered a good sales advance, spurred by another double-digit quarterly increase for vessel sealing products. In Oximetry & Monitoring, operational sales rose at a strong double-digit pace, as higher sales of sensors and monitors were aided by the acquisition of Oridion. Airway & Ventilation sales were well ahead of those in the year-ago quarter, chiefly reflecting a double-digit increase for ventilators, primarily due to the acquisition of Newport Medical. Vascular products posted higher sales, fueled by exceptional gains for neurovascular products and a good performance by peripheral vascular products.
Pharmaceuticals sales of $489 million in the first quarter were essentially unchanged from last year's first-quarter sales of $490 million. Sales of Specialty Pharmaceuticals climbed sharply from those of a year ago, primarily due to the strong performance of EXALGO® (hydromorphone HCl) ER tablets and good growth for generic products that was aided by the launch of generic CONCERTA® ER tablets. Sales of Active Pharmaceutical Ingredients were below those of the prior year, largely attributable to customer order timing. Sales of Contrast Products declined sharply in the quarter, primarily reflecting difficult comparisons from a one-time order in the year-ago period and continued weakness in the United States. First-quarter sales of Radiopharmaceuticals were about even with those of the first quarter of the year before. The Company remains on track for the mid-2013 spin-off of the Pharmaceuticals business.
Medical Supplies first-quarter sales of $434 million were up 2% from the $424 million in the comparable quarter of 2012. Operational sales growth in the quarter was 3%, as foreign exchange rate movement reduced the quarterly sales growth rate by one percentage point. The increase was due to higher sales of both Nursing Care products, which were led by a double-digit gain for enteral feeding, and SharpSafety™ products.
In the first quarter of 2013, Covidien purchased approximately 4.4 million ordinary shares under its previously announced share buyback program.
FISCAL 2013 OUTLOOK
Covidien has updated its fiscal 2013 guidance to reflect the recent U.S. FDA approval of generic CONCERTA®, the extension of the R&D tax credit and better operational performance thus far in the fiscal year. The Company now estimates that net sales in fiscal 2013 will be up 5% to 8%, including foreign exchange at current rates. This compares with prior guidance of a 3% to 6% sales increase in 2013. Net sales are now expected to be up 5% to 8% versus 2012 in the Medical Devices segment and up high single digits or better in the Pharmaceuticals segment. For Medical Supplies, 2013 net sales are now expected to be 1% to 3% above 2012. There is no change to the forecast for operating margin, excluding the impact of one-time items, which is still expected to be in the 22% to 23% range. The effective tax rate, excluding one-time items, is now expected to be in the 17.5% to 18.5% range, compared with prior guidance of 18% to 19%.
While the planned spin-off of the Pharmaceuticals business may have a somewhat dilutive effect on Covidien's 2013 guidance, the underlying operational strength of the business, coupled with the expected benefits from generic CONCERTA® ER tablets, will temper the expected dilution.