Cochlear Ltd. (ASX:COH) is up 8% after reporting a $20 million first half loss.

Total revenue was up 3% to $387 million, the net loss of 35.9 cps was due to $100 million of after-tax recall costs. Due to the short-term nature of the hit to earnings the board increased the dividend 14% to $1.20 (60% franked) record date of 28th February.

Cochlear CEO, Dr Roberts, said “while the $20 million loss was disappointing, the recall costs have been quarantined and importantly, a record number of recipients received a cochlear implant in the first half.”

Management’s best estimate of total probable recall costs of $139 million was charged to cost of sales this half.

Free cash flow was up slightly on a year ago to $71 million.

Back on the growth train
The most important sentence in the half year report was about supply. “With the ongoing manufacturing ramp-up we do not anticipate we will be supply constrained in the second half of the year, as we were in the December quarter.”

Dr Roberts is right, business fundamentals are strong. Cochlear’s growth prospects look strong.

The fall in margins and return on equity is highly likely to be a short-term blip, and the chance to buy shares on the cheap may be quickly fading.

Cochlear’s ROE and Margins Source: S&P Capital IQ

Source: COH 2012 half year results analyst presentation

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Dean Morel is slightly embarrassed to admit he has no position in Cochlear. The Motley Fool’s disclosure policy is as sane as they come.

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