The Cooper Companies, Inc. — Q3 FY2013 10-Q
Business context and period. Cooper is a global medical-device company with two segments: CooperVision, which makes soft contact lenses, and CooperSurgical, which serves women’s healthcare. This filing covers the quarter and nine months ended July 31, 2013; comparisons are with the corresponding FY2012 periods.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | First nine months FY2013 | First nine months FY2012 |
|---|---|---|---|---|
| Net sales | $412.0 million (+9%) | $378.2 million | $1,175.9 million (+12%) | $1,048.8 million |
| Gross profit / margin | $268.3 million / 65% | $240.1 million / 63% | $763.0 million / 65% | $671.2 million / 64% |
| Operating income / margin | $93.6 million / 23% | $77.3 million / 20% | $243.9 million / 20% | $204.4 million / 19% |
| Net income attributable to Cooper stockholders | $89.0 million | $66.9 million | $238.8 million | $176.4 million |
| Diluted EPS | $1.79 | $1.36 | $4.81 | $3.60 |
| Operating cash flow | $103.1 million | $78.1 million | $265.6 million | $200.3 million |
At July 31, 2013, cash was $25.5 million, working capital was $456.7 million, and total debt was $243.6 million, down from $373.7 million at October 31, 2012. Debt-to-equity was 0.10:1. The company had $786.2 million available under its $1.0 billion revolving credit facility and reported compliance with its covenants: interest coverage of 49.74:1 versus a 3.00:1 minimum, and leverage of 0.49:1 versus a 3.75:1 maximum. Capital expenditures were $106.1 million for the nine-month period, compared with $67.1 million a year earlier.
Material changes and drivers
- CooperVision sales rose 5% in the quarter and 8% year to date. Silicone hydrogel products grew 21% worldwide and represented 43% of CooperVision sales, versus 38% a year earlier; multifocal sales grew 33%.
- CooperSurgical sales increased 27% in the quarter and 32% year to date, substantially reflecting the Origio IVF acquisition. Excluding acquisitions, sales grew 4.5% in the quarter and were flat year to date. Fertility products reached 34% of segment sales, compared with 15% a year earlier.
- Consolidated gross margin improved, principally due to lower silicone-hydrogel royalties, manufacturing efficiencies and CooperVision product mix. CooperSurgical margin declined with the greater mix of lower-margin fertility products.
- Operating income grew faster than sales, while interest expense fell 20% year to date, reflecting lower average debt and interest rates. Amortization increased due largely to acquired intangible assets.
- The nine-month effective tax rate was 4.6%, down from 8.5%, primarily because a greater share of taxable income was earned in lower-tax foreign jurisdictions.
Cash flow, outlook and risks
- Year-to-date operating cash flow increased to $265.6 million. The filing attributes the improvement mainly to higher net income; working-capital investment remained significant. Financing activities used $138.1 million, including $124.7 million of net debt repayment and $44.4 million of share repurchases.
- FY2013 results include a $14.1 million insurance gain recorded in Q1 for a business-interruption claim. The claim related to damage at a UK manufacturing facility; the total settlement was $19.1 million, including $5.0 million received in FY2012.
- Management was optimistic about long-term contact-lens and women’s-healthcare markets, but cited economic uncertainty, European conditions and foreign-exchange volatility as risks. It planned FY2013–FY2014 investment to expand single-use lens capacity and believed available cash, operating cash flow and borrowing capacity would fund expected needs. The filing provides no specific consolidated EPS or revenue guidance.
- CooperVision agreed to sell its Aime rigid gas-permeable lens business in Japan, subject to closing conditions and then expected to close in Q4 FY2013. The company expected a $0.25–$0.35 negative impact to FY2013 GAAP EPS and expected the transaction to be EPS-neutral thereafter.
- Other identified risks include manufacturing or supply disruption, competition and product acceptance, regulatory approvals and reimbursement, acquisitions and integration, taxes, currency and interest rates, litigation, and potential goodwill impairment. The annual goodwill review found no impairment.
- The securities class action concerning the 2011 Avaira recall was dismissed with prejudice; no appeal was filed within the prescribed period. A related derivative action was dismissed in July 2013. The filing reported no material change in risk factors from the FY2012 Form 10-K.
Important facts for investors to verify
- How much of CooperSurgical’s growth and future profitability depends on Origio, and whether its integration and fertility-product margins meet expectations.
- Whether planned single-use lens capacity investment translates into sales growth without excessive inventory; inventory months on hand had risen to 7.1.
- The timing and final financial effect of the Aime divestiture, including the estimated FY2013 EPS charge.
- Whether the low effective tax rate is sustainable and how foreign-exchange movements, particularly the yen and euro, affect results.
- Progress in debt repayment, capital spending and share repurchases, and continued compliance with credit-facility covenants.
- Whether the $14.1 million insurance gain and other acquisition-related effects are separated appropriately when assessing underlying earnings and cash generation.