Business context and reporting period
The Cooper Companies, Inc. is a global medical-device company operating CooperVision, which sells contact lenses, and CooperSurgical, which sells women’s healthcare products. This unaudited Form 10-Q covers the three months ended January 31, 2014, compared with the three months ended January 31, 2013; balance-sheet figures are compared with October 31, 2013.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $405.0 million | $379.8 million; up 7% reported |
| Gross profit | $262.9 million; 64.9% margin | $240.5 million; 63.3% margin |
| Operating income | $81.6 million; 20% of sales | $68.8 million; 18% of sales |
| Net income attributable to Cooper stockholders | $71.8 million | $74.7 million |
| Diluted earnings per share | $1.47 | $1.50 |
| Operating cash flow | $68.6 million | $47.6 million |
| Capital expenditures | $61.0 million | $29.3 million |
Cash and cash equivalents were $28.8 million at January 31, down from $77.4 million at October 31. Working capital was $432.8 million. Total debt was $345.7 million, including $44.1 million short-term debt and $301.6 million long-term debt; net debt was approximately $316.9 million. The company had $999.8 million available under its revolving credit facility and reported compliance with debt covenants.
Material changes versus the prior comparable period
- Sales growth was led by CooperVision, up 8% to $326.3 million; CooperSurgical sales were essentially flat at $78.7 million.
- CooperVision operating income increased to $84.1 million from $67.1 million. CooperSurgical operating income was $14.2 million versus $14.1 million.
- CooperVision silicone hydrogel sales grew 29% and rose to 47% of its sales from 40%. Multifocal lens sales grew 24%. Asia Pacific sales declined 9% as reported, primarily reflecting yen weakness; management said regional sales grew excluding currency effects.
- CooperSurgical fertility-product sales grew 15% and increased to 35% of segment sales; medical-office and surgical-procedure product sales declined 6%. Lower-margin fertility mix weighed on segment gross margin.
- Gross margin improved, while reported net income and diluted EPS declined. Q1 2013 included a $14.1 million insurance gain related to a 2011 UK facility incident; there was no comparable gain in Q1 2014.
- Operating cash flow increased, but capital expenditures more than doubled, primarily to expand manufacturing capacity. The company repurchased $50.0 million of stock, versus $44.4 million a year earlier.
Outlook, commentary, risks and unusual items
Management expressed optimism about long-term contact lens and women’s healthcare market prospects but provided no specific fiscal 2014 revenue or earnings guidance in the supplied filing text. CooperVision planned further investment in single-use manufacturing capacity and product development. Management stated that cash, operating cash flow and borrowing capacity should fund operations and expected requirements, while noting that additional debt financing could be sought depending on the scale or timing of business activities.
Management cited global economic uncertainty, European debt concerns, foreign-exchange volatility (particularly the yen, euro and pound), competition, product acceptance, supply disruptions, manufacturing interruptions, regulatory approvals, reimbursement, recalls, litigation, taxes and acquisition integration as risks. Currency movements affected reported regional sales. The company said it hedged a significant portion of variable-rate debt through December 2014, but hedging does not eliminate interest-rate or foreign-exchange exposure.
Other notable items: share-based compensation expense was $15.6 million, up from $9.9 million; the effective tax rate was 9.1%, versus 7.5%, with the filing attributing the below-U.S.-statutory rate primarily to foreign earnings taxed at lower rates. The company reported ordinary-course legal matters and did not expect their resolution to materially adversely affect its financial position, results or cash flows. It reported no material changes to previously disclosed risk factors, no significant changes in critical accounting estimates, and effective disclosure controls as of January 31, 2014.
Important facts for investors to verify
- Whether CooperVision’s product and regional growth persists, particularly given currency impacts and competition in silicone hydrogel and single-use lenses.
- Whether CooperSurgical can improve growth and margins as fertility products become a larger share of sales.
- Execution and returns on the substantial capacity-expansion capital expenditures, and the resulting effect on cash flow and inventory.
- Future share repurchases, debt levels and liquidity, including compliance with credit-facility covenants.
- Developments in foreign exchange, regulatory, reimbursement, product-liability and other legal exposures, and the outcome of tax examinations and uncertain tax positions.