Cooper Companies, Inc. — Q1 Fiscal 2011 10-Q
Reporting period: Three months ended January 31, 2011; comparisons are with the three months ended January 31, 2010. Cooper is a global medical-products company operating through CooperVision (contact lenses) and CooperSurgical (women’s healthcare medical products). Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $293.2 | $260.3 | +13% |
| Gross profit | $176.6 | $149.8 | +18% |
| Gross margin | 60% | 58% | +2 percentage points |
| Operating income | $54.8 | $37.0 | +48% |
| Operating margin | 19% | 14% | +5 percentage points |
| Net income | $45.3 | $20.4 | +122% |
| Diluted EPS | $0.96 | $0.44 | +118% |
| Operating cash flow | $72.9 | $56.1 | +30% |
- CooperVision sales were $243.6 million (+13%); CooperSurgical sales were $49.6 million (+12%, including acquisitions; organic growth was 7%).
- Cost of sales was $116.6 million. SG&A rose 13% to $113.5 million, and R&D rose 28% to $9.7 million.
- Interest expense fell to $7.0 million from $10.2 million; other expense fell to $0.7 million from $2.3 million.
- The effective tax rate was 3.9%, versus 16.4%, primarily reflecting the geographic mix of income. The filing reports $1.8 million tax expense on $47.1 million pretax income.
Cash, liquidity and debt
- Cash was $3.3 million at January 31, 2011, compared with $3.6 million at October 31, 2010. Working capital was $317.3 million, up from $291.8 million; current assets were $503.3 million and current liabilities $186.1 million.
- Operating cash flow of $72.9 million was offset by $28.8 million of capital expenditures and $32.4 million of acquisition spending. Cash declined $0.3 million during the quarter.
- Total debt was $602.2 million, down from $611.1 million; debt-to-equity was 0.35:1. The company refinanced its prior revolver with a $750 million revolving facility and a $250 million delayed-draw term loan, maturing January 2016. It reported $752.4 million available under the facility at quarter-end, including the delayed-draw term loan.
- At January 31, the interest coverage ratio was 9.75:1 against a 3.00:1 minimum; total leverage was 1.85:1 against a 3.75:1 maximum.
Material changes and unusual items
- CooperVision acquired Aime’s contact lens and lens-solution business on December 1, 2010, for approximately $31.4 million cash and $12.3 million of contractual obligations assumed. The acquired operation contributed $5.4 million of Asia-Pacific sales in the quarter.
- A $6.1 million gain from settling a preexisting supply relationship with Aime increased reported operating income. The gain is acquisition-related and should be considered when assessing underlying performance.
- The company completed the Norfolk portion of its CooperVision manufacturing restructuring. The plan’s total charges were approximately $23.1 million; $1.9 million was recorded in Q1 2011, and the company did not expect similar charges from this plan in future periods.
- On February 15, 2011, after quarter-end, Cooper redeemed all $339 million of its 7.125% senior notes using borrowings under the new credit agreement, including the delayed-draw term loan. The company expected to record a Q2 loss including a $12.1 million redemption premium and approximately $4.4 million of unamortized issuance costs.
Management outlook, risks and contingencies
- Management expressed optimism about long-term prospects in contact lenses and women’s healthcare but cautioned that economic, employment, housing and credit-market uncertainty could affect fiscal 2011 performance. No specific numerical earnings or revenue guidance is provided in the filing text.
- CooperVision plans additional silicone-hydrogel and PC Technology products, including multifocal and single-use lenses. Management cited late entry, competitors’ advances, and limited capacity for silicone-hydrogel multifocal production as growth and profitability risks. Silicone-hydrogel sales grew 53%; multifocal sales were flat.
- Other disclosed risks include product acceptance and competition, manufacturing or supply disruption, regulatory approvals and compliance, reimbursement, litigation and product liability, acquisitions, foreign exchange and interest rates, and goodwill impairment.
- The filing reports no material change in previously disclosed risk factors and no legal proceedings under Part II. Separately, management disclosed ordinary-course claims and lawsuits and believed their disposition would not materially adversely affect the company.
- Management said disclosure controls were effective at the reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How much of the earnings and operating-income increase reflects recurring business improvement versus the $6.1 million Aime settlement gain and the unusually low 3.9% tax rate.
- Post-redemption debt, interest expense, facility availability and covenant headroom after refinancing and the February note redemption.
- Aime integration results and the contribution from acquired sales, including purchase-accounting assumptions and future amortization.
- Whether inventory growth, rising capital expenditures and manufacturing capacity support the planned product and sales growth.
- Progress against silicone-hydrogel competitors and the launch, capacity and market acceptance of planned products.