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 products and solutions for women’s healthcare. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended July 31, 2014; comparisons are with the corresponding 2013 periods unless otherwise noted.
Financial performance and liquidity
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Net sales | $432.5 million; up 5% | $1,249.8 million; up 6% |
| Gross profit / margin | $280.6 million / 65% | $812.0 million / 65% |
| Operating income / margin | $96.6 million / 22%; up 3% | $267.1 million / 21%; up 10% |
| Net income attributable to Cooper stockholders | $88.1 million, versus $89.0 million | $239.1 million, versus $238.8 million |
| Diluted EPS | $1.80, versus $1.79 | $4.89, versus $4.81 |
| Cash from operations | $107.9 million, versus $103.1 million | $302.8 million, versus $265.6 million |
For the nine months, capital expenditures were $177.9 million, up from $106.1 million, principally to expand manufacturing capacity. Operating cash flow less capital expenditures was approximately $124.8 million. Cash and cash equivalents were $173.8 million at July 31, versus $77.4 million at October 31, 2013. Working capital was $598.1 million, up from $426.0 million.
Debt at July 31 was $347.9 million, including $46.5 million short-term debt and $301.4 million long-term debt. The company reported $999.8 million available under its revolving credit agreement and compliance with covenants (total leverage ratio 0.67:1; minimum interest coverage requirement 3.00:1). These figures predate the August financing and acquisition described below. The nine-month effective tax rate was 8.1%, versus 4.6%; management attributed the below-U.S.-statutory rate primarily to income earned in lower-tax foreign jurisdictions.
Material changes versus prior comparable periods
- CooperVision sales rose 6% in the quarter and 7% year to date; CooperSurgical sales rose 1% and 3%, respectively. CooperVision growth reflected product and volume gains, especially silicone hydrogel lenses. Quarterly silicone hydrogel sales grew 21% and represented 50% of CooperVision sales.
- CooperSurgical nine-month fertility sales increased 11%, while office and surgical procedure sales were essentially flat. Consolidated gross margin remained 65% in both comparison periods.
- Quarterly operating income growth was modest and operating margin decreased from 23% to 22%; management cited Sauflon-related acquisition costs. Year-to-date operating margin improved from 20% to 21%.
- Interest expense fell 34% in the quarter and 35% year to date, reflecting lower average debt balances and rates. Fiscal 2013 nine-month results included a $14.1 million insurance gain; no comparable gain was recorded in 2014.
- Year-to-date capital expenditures increased substantially, and share repurchases totaled $50.0 million. No shares were repurchased during the fiscal third quarter.
Outlook, significant events, and risks
Management expressed optimism about long-term contact-lens and women’s-healthcare markets but did not provide specific quantified revenue or earnings guidance in the supplied filing text. It expects continued investment in single-use lens capacity. Management said MyDay’s gross margin was below the company average during its startup and expected it to improve to the high-single-digit range as the fiscal year ended.
On August 4, 2014, after quarter-end, Cooper entered a new $700 million, three-year unsecured term loan. On August 6, it completed the approximately $1.2 billion Sauflon acquisition, financed with offshore cash, credit facilities, and the new loan. Sauflon expands CooperVision’s single-use silicone hydrogel offerings. Management expects growth, stronger European retailer relationships, and operational synergies, but the purchase-price allocation was still being determined. The company anticipated higher interest expense and reduced cash and existing facility availability following the transaction.
Key risks identified include foreign-exchange and interest-rate movements; acquisition integration, financing, leverage, dilution, and failure to realize anticipated benefits; supply or manufacturing disruptions; competition and product acceptance; regulatory, reimbursement, recall, product-liability, patent, tax, and goodwill-impairment risks. Management reported no goodwill impairment in its annual fiscal-third-quarter assessment. Ordinary-course legal matters were not expected to have a material adverse effect, and the company reported no material change in previously disclosed risk factors. Disclosure controls were deemed effective as of July 31, 2014.
Important facts for investors to verify
- Post-acquisition debt, cash, borrowing availability, covenant headroom, and the financing mix for Sauflon; quarter-end debt and liquidity figures exclude the subsequent transaction.
- Sauflon’s final purchase-price allocation, acquired financial contribution, integration costs, realized synergies, and effect on earnings per share.
- Whether CooperVision’s single-use and silicone hydrogel growth, including expected MyDay margin improvement, continues as anticipated.
- Capital spending requirements, inventory levels (7.0 months on hand at July 31), and working-capital conversion as capacity expands.
- Foreign-currency exposure and the effect of the higher effective tax rate relative to 2013; the filing reports $3.6 million of unrecognized tax benefits that could significantly change within twelve months.