Covidien net sales increase 3% to $2.60 billion in second quarter fiscal 2014

Covidien plc (NYSE: COV) today announced financial results for the second quarter of fiscal 2014. Second-quarter net sales of $2.60 billion increased 3% from the $2.53 billion in the second quarter a year ago. Operational sales growth was 4% in the second quarter, as foreign exchange rate movement lowered the quarterly sales growth rate by just over one percentage point.

"As we continue to invest in and execute our global strategy, we are seeing results in line with our year-to-date expectations" said José E. Almeida, chairman, president and CEO, Covidien. "With the impact of the medical device tax annualized and, at today's rates, the majority of the negative currency impact behind us, we expect the company to return to double-digit EPS growth, possibly as soon as the third quarter."

During the second quarter of 2014, Covidien continued to execute on its strategy of innovation, customer-focused portfolio management, emerging markets growth and driving operational leverage. Recent highlights include:

• Completing the acquisition of Given Imaging, which provides the company additional scale and scope to serve the multibillion dollar global gastrointestinal market.
• Launching the Endo GIA™ Reinforced Reload with Tri-Staple™ technology in both the U.S. and Japan and rolling out additional products including the Puritan Bennett™ 980 ventilator, Symbotex™ Composite Mesh for hernia repair and Kangaroo™ Feeding Tube with IRIS Technology.
• Opening a Covidien Center for Innovation in India, the company's first medical training and education center in the country.
• Acquiring approximately 1.2 million ordinary shares under a previously announced share buyback program, returning over $2.0 billion to shareholders over the last twelve months through share repurchases and dividends.

Second-quarter 2014 gross margin of 58.4% decreased 2.0 percentage points from 60.4% in the prior-year period. On an adjusted basis, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table, second-quarter 2014 gross margin of 58.6% was 1.8 percentage points below that of a year ago. The decline in gross margin primarily resulted from unfavorable foreign exchange.

Selling, general and administrative (SG&A) expenses for the second quarter of 2014 were above those of the prior-year quarter, largely due to an environmental charge recorded during the current quarter related to a site located in Orrington, Maine. On an adjusted basis, SG&A as a percent of sales decreased 110 basis points as a result of productivity improvements. Research and development (R&D) expenses in the second quarter of 2014 increased 11% and represented 5.2% of sales, versus 4.8% of sales a year ago. The 5.2% represents the company's highest level of adjusted R&D spending to date, as the company continues to invest in its strategic initiatives to drive future growth.

In the second quarter of 2014, the company reported operating income of $582 million, versus $522 million in the same period the year before. Second-quarter 2014 adjusted operating income, excluding the specified items on the attached table, was $560 million, compared with $571 million in the previous year. Second-quarter 2014 adjusted operating income, excluding the specified items, represented 21.6% of sales, versus 22.6% of sales a year ago.

The second-quarter 2014 effective tax rate was 26.6%, versus an effective tax rate of 22.4% in the second quarter of 2013. The second quarter fiscal 2014 effective tax rate was negatively impacted by a charge of $104 million, primarily related to the potential settlement of certain tax matters that predate the company's 2007 separation from Tyco International Ltd. The second-quarter 2014 adjusted tax rate, excluding this charge, was 16.7%, versus 16.2%, excluding the specified items on the attached table, in the second quarter a year earlier.

Diluted GAAP earnings per share from continuing operations were $0.97 in the second quarter of 2014, versus $0.80 per share in the comparable quarter last year. Second-quarter 2014 adjusted diluted earnings per share from continuing operations, excluding the specified items on the attached table, were $0.96, versus $0.93 a year ago.

For the first six months of fiscal 2014, net sales of $5.24 billion were 3% above the $5.10 billion in the first half of the previous year. Operational sales growth was 5%, as foreign exchange rate movement lowered the six-month sales growth rate by two percentage points.

The company reported operating income of $1.11 billion in the first six months of fiscal 2014, virtually unchanged from that of the comparable prior year period. Six-month 2014 adjusted operating income, excluding the specified items on the attached table, was $1.16 billion, versus $1.18 billion in the first six months of the prior year. Six-month 2014 adjusted operating income, excluding the specified items, represented 22.1% of sales, versus 23.1% a year ago.

The effective tax rate was 24.7% for the first six months of fiscal 2014, versus an effective tax rate of 19.5% in the same period of 2013. Excluding the specified items on the attached table, the adjusted tax rate for the first six months of 2014 was 17.1%, versus 16.8% in the first six months of 2013.

For the first six months of fiscal 2014, diluted GAAP earnings per share from continuing operations were $1.84, versus $1.75 in the year-ago period. Excluding the specified items on the attached table, adjusted diluted earnings per share from continuing operations were $1.96, versus $1.90 in the comparable period last year.

PRODUCT LINE SALES RESULTS

Surgical Solutions sales of $1.21 billion in the second quarter were 4% higher than the $1.17 billion in the comparable quarter of last year. Operational sales growth was 6%, as foreign exchange rate movement reduced the quarterly sales growth rate by two percentage points. Operationally, second-quarter sales in Advanced Surgical were well above those of the prior year, driven by another double-digit quarterly sales gain for vessel sealing and solid growth for stapling. In addition, sales of Advanced Surgical were aided by the acquisition of Given Imaging. In General Surgical, operational sales were slightly below those of a year ago, primarily as a result of the sale of the Confluent biosurgery product line in January 2014.

For the first six months of fiscal 2014, Surgical Solutions sales rose 5% to $2.47 billion from $2.36 billion in the comparable period a year ago. Operational sales growth was 7%, as foreign exchange rate movement reduced the sales growth rate by two percentage points.

Vascular Therapies sales of $409 million in the second quarter were 1% higher than last year's second-quarter sales of $406 million. Operational sales growth was 2%, as foreign exchange rate movement reduced the quarterly sales growth rate by one percentage point. Sales in Peripheral Vascular were somewhat above those of a year ago, primarily due to notable sales of compression products. Neurovascular sales were unchanged from a year ago, as very good growth in the United States was offset by competitive pressure in the European market, the timing of customer orders in Emerging Markets and a recent voluntary product recall.

For the first six months of fiscal 2014, Vascular Therapies sales increased 1% to $834 million from $822 million in the prior-year period. Operational sales growth was 4%, as foreign exchange rate movement reduced the sales growth rate by three percentage points.

Respiratory and Patient Care second-quarter sales of $976 million were 2% higher than last year's second-quarter sales of $958 million. Operational sales growth was 3%, as foreign exchange rate movement reduced the quarterly sales growth rate by one percentage point. Despite a very weak flu season, Patient Monitoring sales rose moderately during the quarter, primarily resulting from increased sales of capnography products, which grew well above 30%. Sales in Airway & Ventilation grew slightly during the quarter, as a modest increase in sales of ventilators more than offset the decline in sales of airway products. In Nursing Care, sales were somewhat above those in the prior year quarter, mainly due to increases in sales of incontinence and enteral feeding products. Patient Care sales were moderately above those of a year ago, led by an increase in sales of SharpSafety^TM products resulting primarily from favorable pricing and a competitive shortage of pre-filled syringes.

For the first six months of fiscal 2014, Respiratory and Patient Care sales increased 1% to $1.93 billion from $1.92 billion in the comparable period a year ago. Operational sales growth was 2%, as foreign exchange rate movement reduced the sales growth rate by one percentage point.

FISCAL 2014 OUTLOOK

There are no changes to the company's previously issued 2014 guidance.