Covidien plc (NYSE: COV) today reported results for the second quarter of fiscal 2013 (January - March 2013). Second-quarter net sales of $3.10 billion increased 5% from the $2.95 billion reported in the second quarter a year ago. Foreign exchange rate movement lowered the quarterly sales growth rate by two percentage points.
“Our second-quarter performance was paced by broad-based top-line growth and an increase in earnings per share”
Second-quarter 2013 gross margin of 57.6% declined 0.3 percentage points from the 57.9% of the prior-year period. On an adjusted basis, excluding the specified items shown on the attached quarterly Non-GAAP reconciliations table on page 7, second-quarter 2013 gross margin of 57.6% was 0.5 percentage points below that of a year ago. The decline was largely due to the negative impact of the reactor shutdown and unfavorable raw material costs in the pharmaceuticals segment, partially offset by favorable mix and productivity improvements.
Selling, general and administrative expenses for the second quarter of 2013 were above those of the comparable quarter of the year before. This was due to expenses associated with recent acquisitions, increased separation costs, the medical device tax and spending on growth initiatives, primarily to expand the Company's sales and marketing presence in emerging markets. Research and development (R&D) expense in the second quarter of 2013 represented 5.2% of net sales, versus 5.7% of sales in the second quarter of 2012. Excluding expense related to a license agreement, second-quarter 2012 R&D spending represented 5.3% of net sales.
In the second quarter of 2013, the Company reported operating income of $596 million, versus $609 million in the same period the year before. Second-quarter 2013 adjusted operating income, excluding the specified items on the attached table, was $688 million, compared with $652 million in the previous year. Second-quarter 2013 adjusted operating income, excluding the specified items, represented 22.2% of sales, versus 22.1% of sales a year ago.
The second-quarter 2013 effective tax rate was 21.9%, versus an effective tax rate of 13.6% in the second quarter of 2012. The second-quarter 2013 adjusted tax rate, excluding the specified items on the attached table, was 17.6%, versus 17.1% in the second quarter a year earlier.
Diluted GAAP earnings per share from continuing operations were $0.93 in the second quarter of 2013, versus $1.01 per share in the comparable quarter last year. Second-quarter 2013 adjusted diluted earnings per share from continuing operations, excluding the specified items on the attached table, were $1.12, versus $1.05 a year ago.
For the first six months of fiscal 2013, net sales of $6.16 billion were 5% above the $5.84 billion in the first half of the previous year, with foreign exchange rate movement lowering the six-month sales growth rate by two percentage points.
The Company reported operating income of $1.25 billion in the first six months of fiscal 2013, virtually unchanged from that of the comparable period the year before. Six-month 2013 adjusted operating income, excluding the specified items on the attached table on page 11, was $1.37 billion, versus $1.36 billion in the first six months of the prior year. Six-month 2013 adjusted operating income, excluding the specified items, represented 22.3% of sales, versus 23.2% a year ago.
The effective tax rate was 20.5% for the first six months of fiscal 2013, versus an effective tax rate of 15.2% in the same period of 2012. Excluding the specified items on the attached table, the adjusted tax rate for the first six months of 2013 was 17.8%, versus 17.2% in the first six months of 2012.
For the first six months of 2013, diluted GAAP earnings per share from continuing operations were $1.96, versus $2.02 in the year-ago period. Excluding the specified items on the attached table, adjusted diluted earnings per share from continuing operations were $2.22, versus $2.17 in the comparable period last year.
"Our second-quarter performance was paced by broad-based top-line growth and an increase in earnings per share," said José E. Almeida, Chairman, President and CEO. "Once again, in our Medical Devices segment, strong results in stapling, vessel sealing and neurovascular products were the key drivers of our growth. We also delivered a significant sales increase in Pharmaceuticals, led by the excellent performance of both generic and branded products.
"While our reported performance was negatively affected by unfavorable exchange rate movement, operational growth was in line with our expectations and we again generated rapid gains in emerging markets," Mr. Almeida said. "Looking forward, we plan to make the investments necessary to enhance our growth, while continuing to deliver a solid earnings performance. Our robust pipeline of new products, increased market opportunities and capital flexibility should enable us to meet the challenges of the global healthcare marketplace and deliver on our expectations."
BUSINESS SEGMENT RESULTS
Medical Devices sales of $2.09 billion in the second quarter were 4% higher than the $2.00 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. Growth was driven by new products and increased volume. Operationally, second-quarter sales in Endomechanical rose moderately from those of the prior year, fueled by good progress for stapling products that was led by our innovative Tri-Staple™ reloads. In Soft Tissue Repair, sales were slightly higher than those of a year ago, paced by synthetic mesh products and sutures. Sales of Energy products were well above the prior year's level, primarily due to the continued excellent performance of vessel sealing products, which again registered a double-digit quarterly sales gain. Sales in Oximetry & Monitoring climbed sharply from those of the year before, spurred by a strong double-digit advance for monitors and sensors. Airway & Ventilation sales were above those of last year, chiefly reflecting a significant rise in sales of ventilators, aided by the Newport acquisition. Vascular products posted higher quarterly sales, as decreased sales of compression products were more than offset by strong gains for neurovascular and increased sales for peripheral vascular and chronic venous insufficiency products.
For the first six months of fiscal 2013, Medical Devices sales rose 6% to $4.22 billion from $3.99 billion in the comparable period a year ago. Foreign exchange rate movement reduced the quarterly sales growth rate by two percentage points.
Pharmaceuticals sales of $573 million in the second quarter were up 13% from last year's second-quarter sales of $508 million. Sales of Specialty Pharmaceuticals climbed sharply from those of a year ago, primarily due to outstanding growth for generic products, reflecting the first-quarter launch of Methylphenidate HCl ER tablets which accounted for $62 million in sales, coupled with a good performance for EXALGO® (hydromorphone HCl) ER tablets. Sales of Active Pharmaceutical Ingredients were considerably above those of the previous year, largely attributable to a substantial increase for narcotic products. Sales of Contrast Products were notably lower than those of the second quarter of 2012, due to decreased sales of Optiray™ in the United States. Sales of Radiopharmaceuticals were lower than in the prior-year second quarter.
For the first six months of fiscal 2013, Pharmaceuticals sales advanced 6% to $1.06 billion from $998 million a year ago. The increase was primarily attributable to growth for Specialty Pharmaceuticals. Foreign exchange rate movement lowered the quarterly sales growth rate by one percentage point. The Company remains on track for the mid-2013 spin-off of the Pharmaceuticals business.
Medical Supplies second-quarter sales of $439 million were 1% above the $434 million reported in the comparable quarter of 2012, as increased sales of Nursing Care products were partially offset by lower sales of SharpSafety™ and OEM products.
For the first six months of fiscal 2013, sales of Medical Supplies, at $873 million, were 2% above last year's $858 million, led by higher sales of Nursing Care products.
Other
In the second quarter of 2013, Covidien purchased approximately 3.2 million ordinary shares under its previously announced share buyback program.
FISCAL 2013 OUTLOOK
On May 3, 2013, after the close of trading on the New York Stock Exchange, Covidien plans to release financial results for fiscal 2010, 2011, 2012 and the first quarter of 2013, all adjusted for the planned spin-off of the Pharmaceuticals segment. On that date, the Company will announce its 2013 guidance, excluding Pharmaceuticals. Covidien will also announce fiscal 2013 guidance for Mallinckrodt plc on that date.
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