The Cooper Companies, Inc. — Q2 2013 Form 10-Q
Business and period: Global medical-device company operating CooperVision, which sells contact lenses, and CooperSurgical, which sells women’s-healthcare and fertility products. Fiscal second quarter and six months ended April 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $384.0 | $344.6 | $763.9 | $670.6 |
| Gross profit | $254.2 | $220.7 | $494.7 | $431.1 |
| Operating income | $81.5 | $65.4 | $150.3 | $127.2 |
| Net income attributable to Cooper stockholders | $75.1 | $54.9 | $149.8 | $109.5 |
| Diluted EPS | $1.52 | $1.12 | $3.02 | $2.24 |
- Q2 sales grew 11%, gross profit 15%, and operating income 25%; six-month sales grew 14%, gross profit 15%, and operating income 18%.
- Gross margin was approximately 66% in Q2 versus 64% a year earlier; operating margin was approximately 21% versus 19%. Six-month gross and operating margins were approximately 65% and 20%, respectively, versus 64% and 19%.
- Operating cash flow was $114.9 in Q2 versus $80.6; for six months it was $162.5 versus $122.2. Six-month capital expenditures were $67.5 versus $43.1.
- At April 30, cash was $14.4; working capital was $446.9. Total debt was $320.5, down from $373.7 at October 31, 2012. The company had $710.0 available under its $1.0 billion revolving credit facility and reported compliance with covenants (leverage ratio 0.66 versus a maximum 3.75).
- Six-month effective tax rate was 5.9%, versus 9.8% in the prior-year period, principally reflecting the geographic mix of taxable income and lower foreign tax rates.
Changes and business drivers
- CooperVision sales rose 7% in Q2 and 10% for six months. Silicone-hydrogel products grew 29% worldwide and were 43% of sales; multifocal lenses grew 33% in Q2. Growth reflected volume, product mix and new products, with Japanese-yen weakness a partial offset.
- CooperSurgical sales increased 32% in Q2 and 35% for six months, including Origio sales of $20.5 in Q2. Excluding acquisitions, Q2 sales declined 4%. Origio increased fertility products to 33% of CooperSurgical sales from 7% a year earlier and weighed on segment gross margin and operating income.
- CooperVision’s Q2 gross margin improved to 67% from 63%, driven by mix, manufacturing efficiencies and lower silicone-hydrogel royalties. CooperSurgical’s Q2 gross margin declined to 65% from 68%, primarily due to product mix.
- Six-month operating cash flow included the $14.1 insurance gain recognized in Q1 for a prior UK facility interruption. The remaining $11.2 cash payment was received in Q2. The company also cited higher inventory, partly to support single-use lens production and the Avaira relaunch.
Outlook, risks and unusual items
- Management expressed optimism about the long-term contact-lens and women’s-healthcare markets but gave no quantified overall fiscal 2013 revenue or earnings guidance in the supplied filing text. It planned additional single-use manufacturing capacity in fiscal 2013 and 2014 and expected CooperSurgical gross margin to remain around its current range for the rest of fiscal 2013.
- In May 2013, CooperVision agreed to sell its Aime rigid gas-permeable lens business in Japan, subject to closing conditions and then expected to close in Q4 fiscal 2013. Management forecast a $0.25–$0.35 negative impact to fiscal 2013 GAAP EPS and expected the transaction to be EPS-neutral thereafter. Aime revenue was $32.9 in fiscal 2012 and $7.2 in fiscal Q1 2013.
- Other notable items include the $14.1 insurance gain, Origio acquisition-related amortization and operating costs, and the U.S. medical-device excise tax, which added $0.9 to CooperSurgical SG&A for the first six months. The company repurchased $44.4 of shares in Q1; no shares were repurchased in Q2.
- Risks include foreign-exchange and interest-rate movements, acquisition integration and valuation, manufacturing or supply disruption, product acceptance and competition, regulatory and reimbursement matters, and litigation. The securities class action was dismissed without leave to amend on May 31, 2013; the plaintiff could appeal. A related derivative action remained pending, and the company said it could not estimate any potential loss.
Investor verification points
- Separate underlying performance from the $14.1 insurance gain recognized in Q1 and assess the resulting effect on first-half earnings and cash flow.
- Track CooperSurgical’s organic sales, Origio integration, margins and acquisition-related amortization and costs.
- Monitor inventory levels and capital spending for planned contact-lens capacity, alongside cash conversion and working capital.
- Verify the Aime sale’s closing, final charge and subsequent earnings effect; review any appeal or developments in the derivative litigation.
- Assess foreign-currency exposure, the unusually low effective tax rate, and continuing covenant and liquidity headroom.