The Cooper Companies, Inc. — Q2 FY2015 Form 10-Q
Business context and period: Global medical-device company operating CooperVision (contact lenses) and CooperSurgical (women’s healthcare products). This unaudited report covers the three and six months ended April 30, 2015; comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $434.7 million | $412.3 million | $879.8 million | $817.3 million |
| Gross profit | $267.7 million | $268.5 million | $544.1 million | $531.4 million |
| Gross margin | 62% | 65% | 62% | 65% |
| Operating income | $71.0 million | $88.9 million | $144.1 million | $170.5 million |
| Net income attributable to Cooper stockholders | $60.7 million | $79.2 million | $121.9 million | $151.0 million |
| Diluted EPS | $1.23 | $1.62 | $2.48 | $3.09 |
| Operating cash flow | $110.6 million | $126.3 million | $190.5 million | $194.9 million |
Q2 net sales rose 5%, led by CooperVision, up 9% to $359.6 million; CooperSurgical sales fell 8% to $75.1 million. For the first half, CooperVision rose 11% and CooperSurgical declined 6%. Silicone hydrogel products grew 22% in Q2 and represented 55% of CooperVision sales. Foreign exchange weighed on reported sales, particularly in Asia Pacific.
Operating performance weakened despite sales growth: Q2 operating income fell 20% and first-half operating income fell 16%. Cost of sales increased faster than revenue, reducing gross margin by three percentage points. Management cited unfavorable currency effects, Sauflon-related product and equipment rationalization, new-facility start-up costs, increased operating expenses and higher amortization. Q2 interest expense was $4.7 million versus $1.6 million; first-half expense was $8.6 million versus $3.2 million, reflecting higher debt after the Sauflon acquisition.
First-half depreciation and amortization was $87.4 million. Capital expenditures were $118.4 million, primarily for manufacturing capacity. The filing reports Q2 operating cash flow of $110.6 million in MD&A and first-half operating cash flow of $190.5 million in the cash-flow statement.
Liquidity, debt and balance sheet
- At April 30, 2015, cash was $17.9 million and total debt was approximately $1.348 billion, compared with $1.382 billion at October 31, 2014. Debt included $242.2 million short-term and $1.106 billion long-term.
- Working capital was $264.3 million, down from $349.4 million at fiscal year-end. Management attributed the decrease mainly to $200 million borrowed on new uncommitted lines and used to repay higher-interest revolving debt, alongside payment of $51.2 million of Sauflon loan notes.
- $894.8 million remained available under the $1.0 billion revolving Credit Agreement. The company reported compliance with its covenants: leverage ratio 2.37:1 against a maximum of 3.75:1; interest coverage 42.37:1 against a minimum of 3.00:1.
- First-half net cash used in investing was $119.1 million; net cash used in financing was $74.5 million. Cash declined $7.3 million during the half to $17.9 million.
- The first-half effective tax rate was 8.6%, below the U.S. statutory rate primarily because much taxable income is earned in lower-tax foreign jurisdictions.
Material changes, outlook and risks
- The August 2014 Sauflon acquisition expanded CooperVision’s single-use and silicone hydrogel lens portfolio and increased debt, amortization and integration activity. The company estimated total Sauflon restructuring costs of $62 million and expected the work to finish by fiscal Q1 2016. First-half results included $13.9 million of product/equipment rationalization costs in cost of sales and $14.1 million of integration costs in SG&A; management also reduced accrued employee termination costs by $4.5 million in Q2.
- Management expressed optimism about long-term contact lens and women’s healthcare markets, but provided no specific full-year revenue or earnings guidance in the filing. It planned further investment in single-use lens manufacturing capacity and estimated amortization expense of approximately $12.4 million in each of Q3 and Q4 FY2015.
- Management said foreign-currency volatility, European economic and debt uncertainty, healthcare-industry consolidation and the Affordable Care Act could affect FY2015 performance. Other stated risks include acquisition integration and synergy execution, competition and product acceptance, supply and manufacturing disruptions, regulatory matters, reimbursement, interest and currency exposure, and potential impairment or product recalls.
- CooperVision was defending a German patent-infringement suit brought by Johnson & Johnson Vision Care, seeking damages and an injunction; patent-validity and infringement hearings were scheduled for July and August 2015. More than 50 putative U.S. class actions alleged anticompetitive conduct related to contact-lens pricing policies. The company denied the allegations in both matters and said it could not estimate potential loss or assess whether loss was probable.
- Other notable items include a $15.3 million first-half impairment of property, plant and equipment cited in MD&A cash-flow discussion, and a $79.3 million first-half foreign-currency translation loss in other comprehensive income. No goodwill impairment was reported in the most recent annual assessment.
Important facts for investors to verify
- Whether CooperVision’s sales growth and planned capacity expansion translate into improved margins after Sauflon integration, rationalization and start-up costs.
- How foreign exchange, regional demand and CooperSurgical’s continuing sales decline affect full-year results.
- Debt levels, borrowing costs, liquidity and covenant headroom, including the use and terms of uncommitted credit lines.
- Progress and remaining costs under the $62 million Sauflon restructuring plan, and whether expected synergies are realized.
- Developments and any financial exposure in the German patent case and U.S. contact-lens pricing litigation; potential losses were not estimable in the filing.
- Inventory levels and working-capital trends: adjusted inventory months on hand was 7.6 and days sales outstanding was 56 at quarter-end.