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
"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:
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
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.
Covidien is a leading global healthcare products company that creates
innovative medical solutions for better patient outcomes and delivers
value through clinical leadership and excellence. Covidien develops,
manufactures and sells a diverse range of industry-leading medical
device and supply products. With 2013 revenue of $10.2 billion, Covidien
has more than 38,000 employees worldwide in more than 70 countries, and
its products are sold in over 150 countries. Please visit www.covidien.com
to learn more about our business.
CONFERENCE CALL AND WEBCAST
The company will hold a conference call for investors today, beginning
at 8:30 a.m. ET. This call can be accessed three ways:
NON-GAAP FINANCIAL MEASURES
This press release contains financial measures, including operational
growth, adjusted gross margin, adjusted operating income, adjusted
earnings per share and adjusted operating margin, which are considered
"non-GAAP" financial measures under applicable Securities & Exchange
Commission rules and regulations.
These non-GAAP financial measures should be considered supplemental to
and not a substitute for financial information prepared in accordance
with generally accepted accounting principles (GAAP). The company's
definition of these non-GAAP measures may differ from similarly titled
measures used by others.
The non-GAAP financial measures used in this press release adjust for
specified items that can be highly variable or difficult to predict. The
company generally uses these non-GAAP financial measures to facilitate
management's financial and operational decision-making, including
evaluation of Covidien's historical operating results, comparison to
competitors' operating results and determination of management incentive
compensation. These non-GAAP financial measures reflect an additional
way of viewing aspects of the company's operations that, when viewed
with GAAP results and the reconciliations to corresponding GAAP
financial measures, may provide a more complete understanding of factors
and trends affecting Covidien's business.
Because non-GAAP financial measures exclude the effect of items that
will increase or decrease the company's reported results of operations,
management strongly encourages investors to review the company's
consolidated financial statements and publicly filed reports in their
entirety. A reconciliation of the non-GAAP financial measures to the
most directly comparable GAAP financial measures is included in the
tables accompanying this release.
Any statements contained in this communication that do not describe
historical facts may constitute forward-looking statements as that term
is defined in the Private Securities Litigation Reform Act of 1995. Any
forward-looking statements contained herein are based on our
management's current beliefs and expectations, but are subject to a
number of risks, uncertainties and changes in circumstances, which may
cause actual results or company actions to differ materially from what
is expressed or implied by these statements. The factors that
could cause actual future results to differ materially from current
expectations include, but are not limited to, our ability to effectively
introduce and market new products, keep pace with advances in technology
and compete effectively, implementation of healthcare reform in the
United States and globally, cost-containment efforts of customers,
purchasing groups, third-party payors and governmental organizations,
rising commodity costs, risk of cyber-attacks, intellectual property
rights disputes, complex and costly regulation, including healthcare
fraud and abuse regulations and the Foreign Corrupt Practices Act,
recalls or safety alerts and negative publicity relating to Covidien or
its products, product liability losses and other litigation liability,
manufacturing or supply chain problems or disruptions, divestitures of
some of our businesses or product lines, our ability to execute
strategic acquisitions of, investments in or alliances with other
companies and businesses, risks associated with doing business outside
of the United States, foreign currency exchange rates, environmental
liabilities and tax legislation and potential tax liabilities. These
and other factors are identified and described in more detail in our
Annual Report on Form 10-K for the fiscal year ended September 27, 2013,
and in subsequent filings with the SEC. We disclaim any
obligation to update these forward-looking statements other than as
required by law.
(1) Amortization expense of intangible assets is
included in the following income statement captions in the amounts
Gross margin percent
Income from continuing operations before income taxes
Diluted earnings per share from continuing operations
(1) Adjustments are tax effected at the applicable local
statutory tax rates.
(2) Represents charges associated with the exit of our
OneShot™ renal denervation program totaling $35 million, of which $32
million is included in selling, general and administrative expenses and
primarily relates to the impairment of intangible assets. The remaining
$3 million relates to the write-off of inventory and is included in cost
of goods sold. These charges are partially offset by income of $26
million resulting from the reversal of contingent consideration
associated with the fiscal 2012 acquisition of Maya Medical, which is
included in selling, general and administrative expenses. In connection
with these transactions, we recognized $24 million of income tax
expense, of which $22 million related to the write-off of a prepaid tax
asset that had been established in connection with the acquisition of
Maya Medical. This income tax expense was partially offset by an $11
million income tax benefit on the pre-tax charges, resulting in a total
net tax expense of $13 million.
(3) Includes $57 million in restructuring charges, net and $2
million of restructuring-related accelerated depreciation included in
cost of goods sold.
(4) Primarily relates to our portion of Tyco International's
settlement of contract claims under a 2002 tax agreement with CIT Group
Inc., a former subsidiary of Tyco International, which is included in
(5) Relates to potential settlements of certain outstanding
(1) Operational growth, a non-GAAP financial measure,
measures the change in sales between current and prior year periods
using a constant currency, the exchange rate in effect during the
applicable prior year period. See description of non-GAAP financial
measures contained in this release.
(2) Non-U.S. Developed Markets includes Western Europe,
Japan, Canada, Australia and New Zealand.
(3) Emerging Markets includes Eastern Europe, Middle East,
Africa, Asia (excluding Japan) and Latin America.
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