The Cooper Companies, Inc. — Q1 FY2013 10-Q
Reporting period: Three months ended January 31, 2013; comparisons are with the three months ended January 31, 2012 unless otherwise noted. Cooper operates CooperVision, which sells contact lenses, and CooperSurgical, which sells women’s healthcare products and solutions. Results are unaudited.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $379.8 million | $326.1 million | +16% |
| Gross profit / margin | $240.5 million / 63% | $210.5 million / 65% | +14%; margin down 2 points |
| Operating income / margin | $68.8 million / 18% | $61.7 million / 19% | +11%; margin down 1 point |
| Net income attributable to Cooper stockholders | $74.7 million | $54.6 million | +37% |
| Diluted EPS | $1.50 | $1.12 | +34% |
| Cash from operations | $47.6 million | $41.6 million | +$6.1 million |
| Capital expenditures | $29.3 million | $20.0 million | Increased |
| Cash and cash equivalents | $14.4 million | $12.8 million at Oct. 31, 2012 | +$1.6 million |
| Total debt | $408.0 million | $373.7 million at Oct. 31, 2012 | +$34.3 million |
| Working capital | $454.7 million | $395.3 million at Oct. 31, 2012 | +$59.4 million |
Business performance and material changes
- CooperVision: Sales rose 12% to $301.4 million. Silicone hydrogel sales grew 38% and represented 40% of CooperVision sales, versus 32% a year earlier. Multifocal sales grew 31%; single-use sphere sales grew 8%. Regional sales increased 18% in the Americas, 7% in EMEA and 10% in Asia Pacific.
- CooperSurgical: Sales rose 37% to $78.5 million, including $20.9 million from Origio, acquired in July 2012; growth excluding acquisitions was 1%. Fertility products increased to 30% of segment sales from 7% a year earlier.
- Consolidated gross margin declined from 65% to 63%. Cooper cited product mix and currency effects at CooperVision, including growth in lower-margin Avaira products and yen weakness, and a greater mix of lower-margin equipment and Origio fertility products at CooperSurgical. CooperSurgical operating income fell 10% to $14.1 million, while CooperVision operating income rose 20% to $67.1 million.
- Net income included a $14.1 million gain for settlement of a UK facility business-interruption insurance claim. The claim totaled $19.1 million, including $5.0 million received in fiscal Q4 2012; $2.9 million of the remaining amount was received in Q1 and $11.2 million remained receivable at quarter-end. This unusual gain boosted reported pretax income and earnings.
- Fiscal Q1 2013 operating cash flow was higher year over year, but capital spending also increased. Operating cash flow less capital expenditures was approximately $18.3 million, compared with $21.6 million in the prior-year quarter.
Liquidity, debt and capital allocation
Cash was $14.4 million and total debt was $408.0 million at January 31, 2013. Working capital was $454.7 million. The company reported $624.0 million available under its $1.0 billion revolving credit agreement, with maturity in May 2017 and a potential $500 million increase. It was in compliance with its financial covenants: interest coverage of 43.55x against a 3.00x minimum and total leverage of 0.88x against a 3.75x maximum. The debt-to-equity ratio was 0.18:1.
Cooper repurchased 460,477 shares for $44.4 million at an average $96.34 per share in the quarter; approximately $184.5 million remained authorized under its $300 million repurchase program. Management said cash, operating cash flow and borrowing capacity should fund operations and planned capital expenditures, acquisitions, repurchases and dividends. The company plans additional investment in single-use lens manufacturing capacity during fiscal 2013 and 2014.
Outlook, commentary and risks
- No quantified fiscal 2013 revenue or earnings guidance is stated in the supplied filing text. Management expressed optimism about long-term contact-lens and women’s healthcare markets, while citing economic uncertainty, European conditions and currency volatility as risks.
- Management expects Avaira growth and yen weakness to pressure CooperVision gross margin during the rest of fiscal 2013. It also identified competition in silicone hydrogel single-use lenses and the need to expand product offerings and manufacturing capacity.
- The 2.3% U.S. medical-device excise tax took effect January 1, 2013; CooperSurgical U.S. sales are subject to it, while contact lenses are excluded. The quarter’s impact was approximately $0.2 million in SG&A.
- A securities class action concerning alleged misstatements about the 2011 Avaira lens recall was ongoing; defendants moved to dismiss the amended complaint, discovery was stayed, and the company said it could not assess the likelihood or range of any loss. A related shareholder derivative action also remained pending.
- Other stated risks include acquisition integration and purchase-price adjustments, product recalls and litigation, supply or manufacturing disruptions, regulatory and reimbursement matters, competition, foreign exchange and interest-rate movements, taxes, and potential goodwill impairment. Management reported no material change in risk factors from the prior annual report.
Important facts for investors to verify
- How much of reported earnings growth reflected the $14.1 million insurance gain, and how did underlying profitability trend?
- Whether CooperVision’s product mix and currency headwinds, and CooperSurgical’s post-Origio margins, develop as management expects.
- Origio’s contribution to growth and profitability, integration progress, and whether preliminary purchase-accounting estimates change.
- Cash conversion, elevated capital spending, debt levels and planned share repurchases relative to operating cash flow.
- Developments in the Avaira-related securities and derivative litigation and any resulting financial exposure.