Covidien has reported financial results for Q114 (ended December 27 2013). Net sales of US$2,639mn represented an increase of 3% from the US$2,567mn reported in Q113. Operational sales growth for the quarter was 5%, as foreign exchange rate movement lowered the quarterly sales growth rate by two percentage points.
During Q114, 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 proposed 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 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 its Confluent Surgical business to enable even greater focus on growth initiatives. This transaction closed on January 15.
Acquiring approximately 4.5mn shares under a share buyback programme.
Covidien's Q114 gross margin of 59.2% represented a decrease of 0.7% from 59.9% in Q113. On an adjusted basis, Q114 gross margin of 59.4% was 0.5% below that of Q113. 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 Q114 were above those of Q113, largely due to the US medical device excise tax, which was not effective until the company's Q213, and spending on growth initiatives, partially offset by productivity improvements. On an adjusted basis, SG&A as a percentage of sales remained level with that of the comparable Q113 period, reflecting operating leverage. R&D expense in Q114 climbed by 13% and represented 4.7% of net sales, versus 4.3% of Q113 sales.
In Q114, the company reported operating income of US$531mn versus US$596mn in Q113. Q114 adjusted operating income, excluding special items, was US$599mn, compared with US$604mn in Q113. Both operating income and adjusted operating income for Q114 were reduced by approximately US$45mn due to the impact of unfavourable foreign exchange and the US medical device excise tax. Q114 adjusted operating income, excluding special items, represented 22.7% of sales, versus 23.5% of sales in Q113.
Diluted GAAP earnings per share (EPS) from continuing operations were US$0.87 in Q114, versus US$0.96 per share in Q113. Q114 adjusted diluted EPS from continuing operations, excluding the specified items on the attached table, were US$1.00 versus US$0.96 in Q113. This represents a 3% increase despite unfavourable foreign exchange, the US medical device excise tax and incremental investments in emerging markets.
Product Line Sales Results
Surgical Solutions sales of US$1,261mn in Q114 were 6% higher than the US$1,194mn reported in Q113. Operational sales growth was 8%, as foreign exchange rate movement reduced the quarterly sales growth rate by 2%. Operationally, Q114 sales in Advanced Surgical were notably higher than those of Q113, fuelled by a double-digit quarterly sales gain for vessel sealing products and good growth for stapling products, led by the company's Tri-Staple reloads. In General Surgical, operational sales were somewhat above those of Q113, paced by sutures.
Vascular Therapies sales of US$425mn in Q114 were 2% higher than Q113 sales of US$416mn. Operational sales growth was 5%, as foreign exchange rate movement reduced the quarterly sales growth rate by 3%. Sales of Peripheral Vascular were above those of Q113, primarily due to exceptional growth of chronic venous insufficiency products. Neurovascular sales were also somewhat above those of Q113, primarily due to increased sales of coils.
Respiratory and Patient Care Q114 sales of US$953mn were comparable with Q113 sales of US$957mn. Operational sales growth was 2%, as foreign exchange rate movement reduced the quarterly sales growth rate by 2%. In Patient Monitoring, sales rose during the quarter, chiefly resulting from increased sales of capnography products and sensors. Sales in Airway & Ventilation were somewhat below those in Q113, resulting from a significant decline in sales of ventilators. In Nursing Care, sales were somewhat above those in Q113, led by a double-digit gain for enteral feeding products. Patient Care sales were essentially flat from Q113, as a decline in sales of SharpSafety products was partially offset by increased sales of OEM products.
Covidien has updated its FY2014 tax rate guidance. The company now expects that the effective tax rate for FY14 will be in the 16.5-17.5% range, including foreign exchange at current rates and excluding the impact of one-time items.
|Quarter Ended (US$mn)||December 28 2012||December 27 2013||% chg|
|Non-US Developed Markets||528||528||0.0|
|Non-US Developed Markets||135||130||-3.7|
|Respiratory and Patient Care||957||953||-0.4|
|Airway & Ventilation||196||182||-7.1|
|Non-US Developed Markets||278||265||-4.7|
|US Medical Supplies||385||388||0.8|