The Cooper Companies Inc. (COO) posted a 9.2% rise in adjusted earnings per share for fiscal 2014-third-quarter (ended Jul 31, 2014) to $1.90 from the year-ago level of $1.74 but missed the Zacks Consensus Estimate by a penny.
Revenues came in at $432.5 million, reflecting a rise of 5.0% from $412.0 million in the year-ago quarter. Revenues, however, fell shy of the Zacks Consensus Estimate of $444 million. Revenues went up 5% in constant currency, excluding the divestiture of Aime (CooperVision's rigid gas permeable contact lens and solutions business in Japan).
Margins & Expenses
Gross profit rose 4.6% to $280.6 million in the quarter. However, gross margin slid 20 basis points (bps) to 64.9% from 65.1% in the last-year quarter due to product mix and start-up costs associated with MyDay.
Selling, general and administrative (SG&A) expenses went up 6.0% to $161.2 million while research and development (R&D) expenses increased 8.1% to $16.1 million.
Adjusted operating earnings augmented 8.6% to $101.7 million, while adjusted operating margin improved 80 bps to 23.5% compared with 22.7% in the third quarter of the prior fiscal year.
Segment Results
Revenues in the CooperVision (CVI) segment rose 5.9% (6% in constant currency and excluding the divestiture of Aime) to $349.9 million. The segment continued to gain share across all geographies driven by The Cooper Companies’ silicone hydrogel products, especially Biofinity and MyDay. Gross margin remained flat year over year at 65%.
Revenues in the CooperSurgical (CSI) segment inched up 1.3% to $82.6 million, driven by growth in its fertility business. Gross margin improved 100 bps to 65% from 64% in the year-ago quarter led by lower capital equipment sales within fertility and growth in certain surgical products.
Financial Position
The Cooper Companies exited the third quarter with cash and cash equivalents of $173.8 million as of Jul 31, 2014, up 124.6% from $77.4 million as of Oct 31, 2013. Total debt increased 0.95% to $347.9 million as of Apr 30, 2014 from $344.7 million as of Oct 31, 2013. However, the debt-to-capitalization ratio declined 100 bps to 11.5% from 12.5% as of Oct 31, 2013 due to an increase in stockholder’s equity.
In the quarter, The Cooper Companies’ cash flow from operations totaled $107.9 million, up 4.7% from $103.1 million in the year-ago quarter. Capital expenditures surged 44.6% to $55.8 million from $38.6 million in the previous-year quarter. As a result, free cash flow dropped 16.6% to $53.8 million from $64.5 million a year ago.
Guidance
For the fourth quarter of fiscal 2014, The Cooper Companies expects adjusted earnings per share in the band of $2.00–$2.10. The current Zacks Consensus Estimate of $1.85 lies way below the guided range.
Fourth-quarter revenues are anticipated in the range of $477–$490 million, including CVI and CSI revenues of $395–$405 million and $82–$85 million, respectively. The current Zacks Consensus Estimate of $467 million also lies below the guided range.
For fiscal 2014, adjusted earnings are expected in the band of $7.34 to $7.44 compared with the earlier range of $6.80 to $7.00. The current Zacks Consensus Estimate of $6.87 lies way below the guided range.
The Cooper Companies projects higher total revenue of $1,725–$1740 million for fiscal 2014 compared with the prior guidance of $1,685–$1,725 million. This includes CVI revenues of $1,400–$1,412 million and CSI revenues of $325–$328 million, up from the earlier range of $1,365–$1,395 million and $320–$330 million, respectively. The current Zacks Consensus Estimate of $1,731 million lies within the guided range.
Our Take
We are disappointed with The Cooper Companies’ third-quarter results that missed our estimates on both fronts. On Aug 6, 2014, The Cooper Companies completed the acquisition of Sauflon Pharmaceuticals Ltd, a European manufacturer and distributor of soft contact lenses and solutions. Gross and operating margins continue to be pressurized by higher acquisition-related costs.
However, The Cooper Companies upgraded its earnings and revenue outlook for fiscal 2014 which raises our confidence in the stock. Meanwhile, the company continues to gain market share driven by consistent progress with MyDay and growth at the Biofinity and Avaira product families.
Currently, The Cooper Companies carries a Zacks Rank #3 (Hold). Better-ranked stocks include McKesson Corporation (MCK) in the medical/dental supply industry and Alphatec Holdings, Inc. (ATEC) and RTI Surgical Inc. (RTIX) in the medical instruments industry. While Alphatec Holdings and RTI Surgical sport a Zacks Rank #1 (Strong Buy), McKesson Corporation carries a Zacks Rank #2 (Buy).
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