Covidien plc (NYSE: COV) today announced financial results for the first quarter of fiscal 2014 (October - December 2013). First-quarter net sales of $2.64 billion increased 3% from the $2.57 billion in the first quarter a year ago. Operational sales growth in the quarter was 5%, as foreign exchange rate movement lowered the quarterly sales growth rate by two percentage points.
"We are off to an excellent start in fiscal 2014, with results exceeding our expectations," said José E. Almeida, Chairman, President and CEO. "We continued the strong execution of our global strategy during the quarter, further positioning the company for long-term growth and increased shareholder value."
During the first quarter of 2014, Covidien executed on its strategy of innovation, customer-focused portfolio management, emerging markets growth and driving operational leverage. Recent highlights include:
Continuing to grow above market in many product categories including vessel sealing, stapling, sutures and sensors.
Announcing the acquisition of Given Imaging, advancing the company's strategy to more comprehensively address key specialties and procedures globally.
Announcing the addition of two advanced energy devices to Covidien's vessel sealing portfolio -- LigaSure Impact™ and LigaSure™ Blunt Tip -- as well as the new Capnostream® 20p bedside monitor.
Entering into two transactions - one in Brazil and the other in China - that will accelerate the company's emerging markets 'value segment' strategy.
Announcing the sale of the Confluent biosurgery product line to enable even greater focus on growth initiatives. This transaction closed on January 15.
Acquiring approximately 4.5 million ordinary shares under a previously announced share buyback program.
First-quarter 2014 gross margin of 59.2% decreased 0.7 percentage points from the 59.9% of the prior-year period. On an adjusted basis, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, first-quarter 2014 gross margin of 59.4% was 0.5 percentage points below that of a year ago. The positive net impact of price, volume and mix was more than offset by increased manufacturing costs, resulting in a decline in gross margin on both a reported and adjusted basis.
Selling, general and administrative (SG&A) expenses for the first quarter of 2014 were above those of the prior-year quarter, largely due to the medical device tax, which was not effective until the company's second quarter of last year, and spending on growth initiatives, partially offset by productivity improvements. On an adjusted basis, SG&A as a percent of sales remained level with that of the comparable prior-year period, reflecting operating leverage. Research and development (R&D) expense in the first quarter of 2014 climbed 13% and represented 4.7% of net sales, versus 4.3% of sales a year ago.
In the first quarter of 2014, the company reported operating income of $531 million, versus $596 million in the same period the year before. First-quarter 2014 adjusted operating income, excluding the specified items on the attached table, was $599 million, compared with $604 million in the previous year. Both operating income and adjusted operating income for the current quarter were reduced by approximately $45 million due to the impact of unfavorable foreign exchange and the medical device tax. First-quarter 2014 adjusted operating income, excluding the specified items, represented 22.7% of sales, versus 23.5% of sales in the year-ago period.
The first-quarter 2014 effective tax rate was 22.4%, versus an effective tax rate of 16.9% in the first quarter of 2013. The first-quarter 2014 adjusted tax rate, excluding the specified items on the attached table, was 17.5%, relatively unchanged from the first quarter a year earlier.
Diluted GAAP earnings per share from continuing operations were $0.87 in the first quarter of 2014, versus $0.96 per share in the comparable quarter last year. First-quarter 2014 adjusted diluted earnings per share from continuing operations, excluding the specified items on the attached table, were $1.00, versus $0.97 a year ago. This represents a 3% increase despite unfavorable foreign exchange, the medical device tax and incremental investments in emerging markets.
PRODUCT LINE SALES RESULTS
Surgical Solutions sales of $1.26 billion in the first quarter were 6% higher than the $1.19 billion in the comparable quarter of last year. Operational sales growth was 8%, as foreign exchange rate movement reduced the quarterly sales growth rate by two percentage points. Operationally, first-quarter sales in Advanced Surgical were notably higher than those of the prior year, fueled by another double-digit quarterly sales gain for vessel sealing products and very good growth for stapling products, led by the company's innovative Tri-Staple™ reloads. In General Surgical, operational sales were somewhat above those of a year ago, paced by sutures.
Vascular Therapies sales of $425 million in the first quarter were 2% higher than last year's first-quarter sales of $416 million. Operational sales growth was 5%, as foreign exchange rate movement reduced the quarterly sales growth rate by three percentage points. Sales of Peripheral Vascular were above those of a year ago, primarily due to exceptional growth of chronic venous insufficiency products. Neurovascular sales were also somewhat above those of a year ago, primarily due to increased sales of coils.
Respiratory and Patient Care first-quarter sales of $953 million were comparable to last year's first-quarter sales of $957 million. Operational sales growth was 2%, as foreign exchange rate movement reduced the quarterly sales growth rate by two percentage points. In Patient Monitoring, sales rose during the quarter, chiefly resulting from increased sales of capnography products and sensors. Sales in Airway & Ventilation were somewhat below those in the prior year, resulting from a significant decline in sales of ventilators. In Nursing Care, sales were somewhat above those in the prior year quarter, led by a double-digit gain for enteral feeding products. Patient Care sales were essentially flat from a year ago, as a decline in sales of SharpSafetyTM products was partially offset by increased sales of OEM products.
FISCAL 2014 OUTLOOK
Covidien has updated its fiscal 2014 tax rate guidance. The company now expects that the effective tax rate for 2014 will be in the 16.5% to 17.5% range, including foreign exchange at current rates and excluding the impact of one-time items. There are no other changes to the 2014 guidance Covidien previously issued in December 2013.