Cooper Earnings Beat, Rev Misses Est

Zacks

The Cooper Companies Inc. (COO) reported second-quarter fiscal 2013 (ended Apr 30) adjusted earnings per share of $1.50 beating the Zacks Consensus Estimate of $1.37 and the year-ago earnings of $1.12 per share.

Profit soared 36.8% on a year-over-year basis to $75.1 million ($1.52 per share) in the fiscal second quarter.

Revenues

Cooper’s revenues in the fiscal second quarter increased 11% (up 15% in constant currency) year over year to $384 million, missing the Zacks Consensus Estimate of $390 million. Growth was led by robust sales of fertility offerings from CooperSurgical (CSI) and higher revenues from CooperVision (CVI).

Segment Analysis

Revenues from Cooper’s mainstay contact lens division (80.5% of company-wide revenues), CVI moved up 7% (up 11% in constant currency) year over year at $309.3 million. Sales were higher for all categories of lenses. Sales for the mainstay toric lenses increased 8% (up 10% in constant currency) to $96.7 million; multifocal lens sales surged 33% (up 34% in constant currency) to $29.7 million. Cooper’s revenues from single-use sphere lenses improved 2% (up 11% in constant currency) to $63.7 million while revenues from non single-use sphere lenses increased 5% (up 8% in constant currency) on a year-over-year basis to $119.2 million.

On a geographical basis, Cooper’s revenues from EMEA and Americas were up 8% and 12%, respectively in constant currency, and increased 13% in the Asia Pacific. On a material based analysis, sales of silicone hydrogel contact lenses were up sharply 31% in constant currency to $133.5 million while Proclear contact lens sales edged up 11% to $77.3 million.   

The smaller women’s health segment (19.5% of company-wide revenues) CSI performed well with revenues soaring 32% year over year to $74.7 million. Cooper witnessed mixed contributions from operating units under its CSI segment. Surgical procedures revenues dropped 3% year over year to $21.3 million; revenues from fertility sub-division jumped 527% to $24.7 million whereas office sales decreased 6% to $28.7 million.

Margin Trends

Gross margin was 66.2% in the second quarter, higher than the 64% a year ago.  Gross margin for CVI was 66.6% compared with 63.3% in the prior-year quarter. Operating margin was 21.2% in the reported quarter, up 220 basis points year over year on account of improved gross margin.

Selling, general and administrative expenditure increased 10% year over year to $151 million while research and development expenses moved up 11.2% to $14.5 million in the reported quarter.

Financial Health

Cooper exited fiscal second quarter with cash and cash equivalents of $14.4 million, flat on a sequential basis. Long-term debt decreased 22.8% sequentially to $291.5 million in the quarter.

The company generated $114.9 million of operating cash flow in the quarter. Cooper spent $38.2 million on capital expenditure yielding free cash flow of $77.4 million, after minor adjustment.

Outlook

For fiscal 2013, Cooper envisages revenues in the range of $1,575 million and $1,605 million (earlier $1,575 million to $1,625 million), comprising CVI sales of $1,260 million to $1,280 million and CSI sales of $315 million to $325 million.

The company expects reported earnings per share in the band of $6.42 and $6.52 (earlier $6.22 and $6.37) for fiscal 2013. Cooper also guided to adjusted earnings per share between $6.15 and $6.25 (earlier $5.95 and $6.10). Free cash flow is expected in the range of $170 million to $200 million (earlier $170 million to $200 million).

Our Take

The outlook for the contact lens industry is favorable. Trade up to value added lenses, such as silicone hydrogel or one-day lenses, constitutes a major avenue for growth. A trade up to 1-day disposable lenses sharply increases per user sales and profit. The company continues to grow sales at higher than market growth rates.

Cooper is a leader in the high-margin toric lens market. It offers multiple designs of toric lenses across a wide range of parameters, unlike some of its competitors, who offer toric lenses in a limited number of designs.

However, Cooper faces formidable competition in each of its major product lines. Competition comes from well established global contact lens makers. Depressed levels of consumer spending have heightened the company’s competitive pressures.

The stock currently carries a Zacks Rank #3 (Hold). We are also positive about Becton, Dickinson and Company (BDX), CONMED Corporation (CNMD) and Steris Corp. (STE) each of which carries  a Zacks Rank #2 (Buy) and are expected to do well.
 

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