Business context and reporting period
The Cooper Companies, Inc. filed this unaudited Form 10-Q for its fiscal second quarter and six months ended April 30, 2018. Its two operating segments are CooperVision, which sells contact lenses, and CooperSurgical, focused on women’s health, fertility, diagnostics and contraception.
Financial results and liquidity
| Metric | Three months ended Apr. 30, 2018 | Six months ended Apr. 30, 2018 |
|---|---|---|
| Net sales | $631.3 million; +21% | $1,221.3 million; +20% |
| Gross profit / margin | $404.5 million / 64% | $775.4 million / 63% |
| Operating income / margin | $74.7 million / 12%; down 36% | $164.8 million / 13%; down 21% |
| Net income (loss) attributable to Cooper stockholders | $60.9 million | $(61.6) million |
| Diluted EPS | $1.23 | $(1.26) |
| Operating cash flow | $170.8 million, per MD&A | $197.1 million |
Second-quarter gross profit rose 18%, while operating income and diluted EPS declined from $117.1 million and $2.12 a year earlier. For the six months, operating cash flow fell from $240.1 million in 2017. Investing used $1,418.6 million, mainly for acquisitions; financing provided $1,296.3 million. Cash at April 30 was $164.9 million.
Total debt was $2,483.7 million, up from $1,172.7 million at October 31, 2017; debt-to-equity was 0.78:1. The company reported $812.0 million in working capital and $805.7 million available on its revolving facility. It was in compliance with debt covenants: leverage ratio 2.67:1 against a maximum 3.75:1, and interest coverage 15.68:1 against a minimum 3.00:1. Management said available cash and expected operating cash flow should cover anticipated needs for at least 12 months.
Material changes and notable items
- Sales growth reflected CooperVision growth of 14% in both the quarter and first half, and CooperSurgical growth of 44% and 38%, respectively. CooperSurgical’s increase was primarily associated with the PARAGARD acquisition.
- PARAGARD was acquired for approximately $1.1 billion in November 2017. The company also acquired Paragon Vision Sciences, Blueyes and LifeGlobal during the first half. Acquisition spending was $1,320.7 million, funded in part by a new $1.425 billion term loan.
- Higher acquired-intangible amortization, PARAGARD inventory step-up and integration costs weighed on margins and operating income. CooperSurgical recorded a $24.4 million impairment of Recombine-related intangible assets.
- The six-month net loss included a provisional $202.0 million tax charge related to the 2017 U.S. Tax Cuts and Jobs Act, including a $177.9 million provisional transition-tax expense. The tax accounting remained incomplete and could be revised.
- The U.K. tax authority issued a £31.0 million diverted profits tax notice concerning transferred intellectual property. Cooper paid the amount in January 2018 and intends to contest the notice.
Outlook, risks and contingencies
Management expressed optimism about the long-term contact lens and health-care markets but gave no specific numerical revenue or earnings guidance in the provided filing text. It highlighted growth opportunities in silicone hydrogel lenses and CooperSurgical’s expanded portfolio. On June 1, 2018, CooperSurgical announced it would exit carrier screening and non-invasive prenatal testing; expected exit and restructuring costs were approximately $10–$15 million, to be recognized as incurred, with most activity expected to finish by fiscal year-end.
Risks discussed include acquisition integration and leverage, variable interest rates, foreign exchange, tax-law interpretation, regulatory and product risks, litigation, supply disruptions, and IT/ERP implementation and cybersecurity. The contact-lens pricing class-action settlement remained subject to court approval. Management reported disclosure controls as effective; evaluation of PARAGARD’s internal controls was ongoing.
Important facts for investors to verify
- How much of sales growth and future profitability is attributable to acquired businesses, particularly PARAGARD, versus underlying volume and product mix.
- Final measurement of the provisional $202.0 million tax charge and its effects on earnings, cash taxes and foreign earnings.
- Resolution and potential financial impact of the U.K. diverted profits tax dispute.
- Integration, amortization, inventory step-up and restructuring costs, including the announced $10–$15 million exit-cost estimate.
- Debt reduction, variable-rate exposure and working-capital trends; the filing estimates a 100-basis-point rate move would change quarterly interest expense by about $6.1 million.
- Reconciliation of quarterly operating cash flow: MD&A cites $170.8 million, while the provided cash-flow statement reports six-month cash flow of $197.1 million.