Cooper Companies, Inc. — Q2 2011 Form 10-Q
Reporting period: Fiscal second quarter and six months ended April 30, 2011; comparisons are with the corresponding 2010 periods. Cooper operates CooperVision, which makes contact lenses, and CooperSurgical, which sells medical devices and products primarily for women’s healthcare. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $325.3 | $289.3 | $618.5 | $549.5 |
| Gross profit | $201.8 | $163.5 | $378.4 | $313.3 |
| Gross margin | 62% | 57% | 61% | 57% |
| Operating income | $60.3 | $39.0 | $115.0 | $76.0 |
| Net income | $35.4 | $4.5 | $80.7 | $24.9 |
| Diluted EPS | $0.73 | $0.10 | $1.69 | $0.54 |
| Operating cash flow | $64.9 | $71.6 | $137.8 | $127.8 |
- Q2 sales increased 12%; six-month sales increased 13%. CooperVision sales rose 14% and 13%, respectively, while CooperSurgical sales rose 6% and 9%.
- Q2 operating margin rose to 19% from 13%; six-month operating margin rose to 19% from 14%. Management attributed stronger gross margins mainly to manufacturing efficiencies and product mix, including growth in higher-margin silicone hydrogel lenses.
- SG&A and R&D increased: Q2 SG&A rose 14% and R&D 21%; for six months, they rose 13% and 24%. The company cited greater sales and marketing, infrastructure, clinical-trial and product-development investment.
- Six-month cash from operations was $137.8, versus $127.8. Investing used $88.6, including $52.0 of capital expenditures and $36.6 for acquisitions. Financing used $44.7. Cash at April 30 was $8.4.
Balance sheet, debt and liquidity
- At April 30, 2011, total debt was $553.2, down from $611.1 at October 31, 2010; cash was $8.4. Working capital was $332.3, versus $291.8. Debt/equity was 0.31:1, compared with 0.37:1.
- In January, Cooper refinanced its prior revolving facility with a $750 million multicurrency revolver and a $250 million term loan, both maturing in January 2016. It redeemed $339 million of senior notes in February, funding the purchase with borrowings under the new agreement. Available credit at quarter-end was $460.4.
- The company reported covenant ratios of 12.33x interest coverage (minimum 3.00x) and 1.61x total leverage (maximum 3.75x), and said it was in compliance. It expects cash, operating cash flow and available credit to support operations, capital expenditures, dividends and acquisitions.
- Inventory rose to $249.4 from $227.9; inventory months on hand was 6.1, versus 5.7 a year earlier. Days sales outstanding was 54 days, consistent with the prior-year period.
Material changes, outlook and risks
- Reported Q2 2011 results include a $16.5 loss on extinguishment of debt, including a $12.1 redemption premium and $4.4 write-off of unamortized costs. Prior-year Q2 results included a $27.0 litigation-settlement charge. The prior-year settlement received final court approval in December 2010.
- Six-month 2011 results include a $6.1 gain from settling a preexisting supply relationship as part of the December 2010 acquisition of certain Aime assets. The company also acquired Apple Medical in April 2011.
- Management expressed optimism about long-term contact lens and women’s healthcare markets but gave no quantified fiscal 2011 earnings or revenue guidance in the provided filing text. It cited ongoing economic uncertainty as a risk and said it did not expect material business or supply effects from Japan’s March earthquake and tsunami, while continuing to monitor the situation.
- CooperVision planned further silicone hydrogel launches, including Biofinity in Japan in 2011. Management cautioned that later entry into silicone hydrogel, competitors’ products and limited capacity for silicone hydrogel multifocal lenses could constrain growth; it had not yet marketed a silicone hydrogel single-use product.
- The IRS issued a deficiency notice concerning 2005–2006 tax returns and a proposed Subpart F adjustment. The company intends to contest it; if sustained, existing federal net operating loss carryforwards could be materially reduced, although management said the proposed taxes would be offset by those carryforwards except for $1.2.
- A patent-infringement lawsuit filed in April 2011 alleges infringement involving silicone hydrogel contact lenses and seeks unspecified damages, potentially including treble damages, and an injunction. The company said it intends to defend the action; it had not been served, and no discovery or trial date had been set.
- Other stated risks include foreign-exchange and variable-rate interest exposure, raw-material supply disruptions, product acceptance and competition, regulatory approvals, reimbursement, acquisitions and potential goodwill impairment. The company reported no material change to previously disclosed risk factors.
Key facts for investors to verify
- Whether sales growth and margin improvement persist, especially in CooperVision’s silicone hydrogel and single-use products and across regions.
- Whether rising inventory, capital spending and acquisition activity convert into sustainable cash generation.
- Debt refinancing economics, future interest expense, covenant headroom and utilization of the $460.4 million available credit.
- Potential financial and product consequences of the patent suit and the outcome of the IRS dispute, including any effect on tax attributes.
- How much reported earnings growth reflects operating performance versus the debt-redemption charge, prior-year litigation charge and acquisition-related gain.