Business context and reporting period
The Cooper Companies, Inc. (Cooper) is a global medical-device company operating CooperVision, which sells contact lenses, and CooperSurgical, which sells women’s-healthcare devices and procedure solutions. This unaudited Form 10-Q covers the fiscal second quarter and six months ended April 30, 2014; comparisons are with the corresponding 2013 periods.
Financial performance
| Metric | Three months ended Apr. 30, 2014 | Change vs. 2013 | Six months ended Apr. 30, 2014 | Change vs. 2013 |
|---|---|---|---|---|
| Net sales | $412.3 million | +7% | $817.3 million | +7% |
| Gross profit | $268.5 million | +6% | $531.4 million | +7% |
| Gross margin | 65% | 66% prior year | 65% | 65% prior year |
| Operating income | $88.9 million | +9% | $170.5 million | +13% |
| Operating margin | 22% reported | 21% prior year | 21% reported | 20% prior year |
| Net income attributable to Cooper stockholders | $79.2 million | vs. $75.1 million | $151.0 million | vs. $149.8 million |
| Diluted EPS | $1.62 | vs. $1.52 | $3.09 | vs. $3.02 |
Second-quarter sales grew in both segments: CooperVision was $331.1 million (+7%) and CooperSurgical $81.2 million (+9%). First-half sales were $657.4 million (+8%) and $159.9 million (+4%), respectively. CooperVision’s second-quarter multifocal sales grew 20% and silicone-hydrogel products grew 21%; CooperSurgical fertility-product sales grew 17% in the quarter.
Cash flow, balance sheet and liquidity
- Operating cash flow was $126.3 million in the second quarter versus $114.9 million; first-half cash from operations was $194.9 million versus $162.5 million.
- First-half capital expenditures were $122.2 million versus $67.5 million, primarily to expand manufacturing capacity. Investing cash outflow was $119.8 million; financing cash outflow was $70.1 million.
- At April 30, cash was $82.7 million; total debt was $335.4 million, comprising $33.9 million short-term and $301.5 million long-term. Working capital was $500.0 million. Total assets were $3.22 billion and stockholders’ equity was $2.56 billion.
- The company had $999.8 million available under its $1.0 billion revolving credit facility and $300.0 million outstanding under its term loan. It reported compliance with covenants: interest coverage of 69.18x against a 3.00x minimum and leverage of 0.66x against a 3.75x maximum.
- First-half share repurchases were $50.0 million; $211.5 million remained authorized. Cooper paid approximately $1.4 million in dividends.
Material changes, outlook and risks
- Second-quarter CooperVision gross margin fell to 65% from 67%, which management attributed primarily to product mix and MyDay start-up costs and manufacturing-capacity investment. Management expected MyDay gross margin to reach the high-single-digit range by fiscal year-end.
- First-half results include no insurance gain, compared with a $14.1 million gain in the 2013 period related to a UK facility business-interruption claim. The prior-year gain affects year-over-year comparisons of pretax income.
- First-half effective tax rate was 9.2%, versus 5.9% in 2013; management attributed the below-U.S.-statutory rate primarily to income earned in lower-tax foreign jurisdictions.
- Management expressed optimism about the long-term contact-lens and women’s-healthcare markets but gave no specific fiscal 2014 revenue or earnings guidance. It cited economic and foreign-exchange volatility, especially in the yen, euro and pound, as risks. Cooper planned further investment in single-use lens manufacturing capacity.
- Other disclosed risks include acquisition execution and integration, manufacturing or supply disruptions, competition and product acceptance, recalls, regulatory approvals and compliance, reimbursement, litigation, tax changes, and possible goodwill impairment. Management said ordinary-course legal matters were not expected to have a material adverse effect; it reported no material change in risk factors from its prior Form 10-K.
- Management stated disclosure controls were effective as of April 30, 2014, and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether MyDay’s launch and capacity costs improve as management expected, and how product mix affects CooperVision margins.
- How much of reported sales growth reflects underlying unit growth versus foreign-currency effects, particularly in Europe and Asia Pacific.
- The pace and returns of the substantial manufacturing-capacity investment, given the increase in first-half capital expenditures.
- Cash conversion and working-capital trends, including inventory months on hand of 7.2 at April 30 versus 6.9 at October 31, 2013.
- Tax-rate sustainability and the status of tax examinations and unrecognized tax benefits; the filing reports $28.8 million of unrecognized tax benefits that would affect the effective tax rate if recognized.
- Debt covenant headroom, foreign-exchange and interest-rate exposures, and the company’s allocation of cash among investment, acquisitions and share repurchases.