Cooper Companies, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 31, 2015; comparisons are with the three months ended January 31, 2014, except balance-sheet comparisons, which are with October 31, 2014.
Business context and results
Cooper operates CooperVision, which sells contact lenses, and CooperSurgical, which sells women’s healthcare products and procedure solutions. Results include Sauflon, acquired in August 2014, within CooperVision.
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $445.2 million | $405.0 million | Up 10% |
| Gross profit / margin | $276.4 million / 62% | $262.9 million / 65% | Profit up 5%; margin down 3 percentage points |
| Operating income / margin | $73.1 million / 16% | $81.6 million / 20% | Down 10% |
| Net income attributable to Cooper stockholders | $61.2 million | $71.8 million | Down 15% |
| Diluted EPS | $1.25 | $1.47 | Down 15% |
| Operating cash flow | $79.8 million | $68.6 million | Up $11.3 million |
| Capital expenditures | $65.0 million | $61.0 million | Up $4.0 million |
CooperVision sales grew 13% to $369.3 million, supported by Sauflon and silicone hydrogel products; single-use products and multifocal lenses were growth areas. CooperSurgical sales fell 4% to $75.8 million, mainly reflecting lower fertility-product sales and currency effects. Sales were also affected by currency: EMEA CooperVision sales rose 25%, while Asia Pacific sales fell 7%; management attributed part of the regional results to exchange-rate movements.
Financial position and liquidity
- At January 31, cash was $16.4 million, working capital was $404.5 million, and total debt was $1.395 billion, versus $1.382 billion at October 31, 2014.
- Debt comprised $92.8 million short term and $1.303 billion long term. The company had $698.5 million available under its revolving credit facility; $51.7 million of Sauflon loan notes were payable in fiscal Q2.
- Management reported compliance with debt covenants: total leverage ratio 2.45:1 against a maximum 3.75:1, and interest coverage 55.74:1 against a minimum 3.00:1.
- Cash declined by $8.8 million during the quarter. Operating cash flow was partly offset by $65.2 million of investing outflows, primarily capital spending, and $20.2 million of financing outflows.
- Foreign-currency translation produced a $113.6 million other comprehensive loss, contributing to a $51.8 million comprehensive loss for the quarter despite positive net income.
Material changes, outlook, and risks
- Revenue growth did not translate into higher operating profit: gross margin contracted, operating expenses increased, and interest expense rose to $3.9 million from $1.7 million, reflecting acquisition-related debt.
- Q1 included $8.7 million of product-rationalization charges in cost of sales, $0.1 million of employee termination costs, and $5.9 million of CooperVision integration costs. Management cited $9.4 million of equipment-rationalization expenses and $6.5 million of restructuring and integration expenses in its highlights. The Sauflon integration plan has estimated total restructuring costs of $74 million and is expected to be completed by fiscal Q1 2016.
- Management expressed optimism about long-term contact lens and women’s healthcare markets, but identified economic and currency uncertainty, healthcare-industry consolidation, acquisition integration, competition, supply disruption, regulation, and product acceptance as risks. It planned continued capital investment to expand single-use lens manufacturing capacity, but provided no specific full-year revenue or earnings guidance in the supplied text.
- Management expected about $12.2 million of amortization expense in each of fiscal Q2–Q4 2015. It said cash, operating cash flow, and borrowing capacity were expected to fund the Q2 loan-note redemption and ongoing requirements, while noting that additional debt financing could be sought depending on business activity.
- Johnson & Johnson Vision Care sued CooperVision in Germany alleging patent infringement and seeking damages and an injunction for certain products. CooperVision denies the allegations and is challenging the patent; the company could not estimate the likelihood or amount of any loss.
Important facts for investors to verify
- How much of CooperVision’s growth is organic versus attributable to Sauflon, and whether silicone hydrogel and single-use growth can sustain margins.
- Progress and final costs of Sauflon integration, restructuring, and planned manufacturing-capacity investment.
- Debt repayment and liquidity after the Q2 loan-note redemption, alongside covenant headroom and potential additional financing needs.
- Foreign-exchange exposure and its effects on sales, margins, debt, and accumulated other comprehensive loss.
- Developments in the German patent litigation and any resulting financial or product-market impact.