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The Cooper Companies Inc. (COO - Analyst Report) reported earnings and revenues for the fiscal fourth quarter ended Oct 31, 2013, both of which lagged the Zacks Consensus Estimate. The company’s adjusted earnings of $1.48 per share exceeded the year-ago level earnings merely by a penny. It missed the Zacks Consensus Estimate by 32 cents as well as the company’s own guidance of $1.76–$1.81 for the quarter. On a reported basis, earnings per share were $1.15, down 21.2% from $1.46 a year ago.

Revenues in the quarter grew 3.9% to $411.9 million, which was below the Zacks Consensus Estimate of $422 million, but consistent with the COO’s guidance between $410 and $425 million (albeit at the lower end). The company benefited from its Biofinity lineups and launch of MyDay daily disposable lenses.

Gross margin was flat at 64% compared with the last year's quarter. The positive impact on gross margin due to lower royalty payment on silicone hydrogel lens sales and higher manufacturing efficiencies was offset by lower revenues due to currency, mainly Japanese Yen.

Operating margin dipped 5 percentage points to 15% in the quarter. The decline was caused by $21.1 million in costs related to the completion of the Aime divestiture. Excluding these costs, operating margin was 20%.

Segment Results

Revenues in the CooperVision (CVI) segment rose 2.8% (6% in constant currency) to $327.1 million. Gross margin was flat at 64% due to the same reasons affecting the overall gross margin of the company.

Revenues in the CooperSurgical (CSI) segment went up 8.4% to $84.8 million. Gross margin was flat at 64% for this segment as well.

Fiscal 2013 Results

For fiscal 2013, Cooper Companies posted a 15.3% rise in adjusted earnings to $5.95 per share from $5.16 a year ago. Reported earnings were $5.96 during the year, up 18.0% from $5.05 in fiscal 2012.

Revenues increased 9.9% to $1,587.7 million, and 8% excluding currency and acquisitions. CVI revenues grew 7% (10% in constant currency) to $1,268.3 million, and CSI revenues surged 25% (3% excluding acquisitions) to $319.4 million.

Financial Position

Cooper exited fiscal fourth quarter with cash and cash equivalents of $77.4 million as of Oct 31, 2013 compared with $12.8 million as of Oct 31, 2012. Total debt decreased 7.8% to $344.7 million as of Oct 31, 2013 from $373.7 million as of Oct 31, 2012 due to the repurchase of 960 thousand shares for $123.0 million. Consequently, debt-to-capitalization ratio decreased 210 basis points to 12.5% from 14.6% as of Oct 31, 2012.

In the fiscal year, COO’s operating cash flow more than halved to $150.3 million from $315.1 million a year ago. Capital expenditures fell 27.8% to $72.0 million from $99.8 million. Consequently, free cash flow declined significantly to $78.3 million from $230.4 million a year ago.

Looking Forward

For fiscal 2014, Cooper Companies expects total revenues between $1,675 and $1,735 million, including CVI and CSI revenues of $1,355–$1,395 million and $320–$340 million, respectively. Both reported and adjusted earnings are expected in the range of $6.70–$7.00 for the year.

Our Take

Cooper Companies 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, COO 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.

We are disappointed about the earnings and revenue miss in the fourth quarter. Although the guidance is promising, we are not yet ready to take it into confidence. Currently, Cooper Companies carries a Zacks Rank #4 (Sell).

While we avoid COO, some better-ranked medical/dental supplies stocks include Align Technology Inc. (ALGN - Analyst Report), McKesson Corporation (MCK - Analyst Report) and Merit Medical Systems, Inc. (MMSI - Snapshot Report). All of them carry a Zacks Rank #1 (Strong Buy).
 

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