The Cooper Companies, Inc. — Q1 FY2016 10-Q
Reporting period: Three months ended January 31, 2016, compared with the three months ended January 31, 2015, unless otherwise noted. Cooper is a global medical-device company operating through CooperVision (contact lenses) and CooperSurgical (women’s healthcare).
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $449.6 million | $445.2 million | Up 1% |
| Gross profit / margin | $262.0 million / 58% | $276.4 million / 62% | Profit down 5% |
| Operating income / margin | $57.4 million / 13% | $73.1 million / 16% | Down 21% |
| Net income attributable to Cooper stockholders | $51.4 million | $61.2 million | Down 16% |
| Diluted EPS | $1.05 | $1.25 | Down 16% |
| Operating cash flow | $89.5 million | $79.8 million | Up $9.7 million |
| Capital expenditures | $45.2 million | $65.0 million | Down |
- Business units: CooperVision sales were $364.3 million, down 1%; CooperSurgical sales were $85.3 million, up 12%. CooperVision operating income fell to $52.8 million from $73.2 million, while CooperSurgical operating income rose to $15.5 million from $13.2 million.
- Margins and cost pressures: Consolidated cost of sales rose 11% despite 1% sales growth. Management cited foreign-exchange pressure, Sauflon product and equipment rationalization, and start-up costs at new manufacturing facilities. CooperSurgical margin also faced unfavorable mix from acquired products.
- Cash flows: Investing activities used $106.0 million, including $45.2 million of capital spending and $60.9 million for acquisitions, primarily Research Instruments. Financing activities provided $17.8 million, principally from net debt borrowings.
- Liquidity and debt: Cash was $16.0 million at January 31, 2016. Total debt was $1.377 billion; working capital was $496.5 million, compared with $272.6 million at October 31, 2015. The working-capital increase was primarily due to reclassifying $200 million of revolving-line borrowings as long-term debt based on the planned refinancing. The company reported $862 million available under its then-existing revolving facility and compliance with debt covenants (total leverage ratio 2.41:1; interest coverage 29.09:1).
- Other comprehensive loss: Cooper reported a $113.8 million foreign-currency translation loss, contributing to comprehensive loss attributable to Cooper stockholders of $62.0 million.
Material changes and notable items
- CooperVision’s sales were affected by $20.1 million of unfavorable foreign-exchange movements. Silicone hydrogel products grew 7% and represented 57% of CooperVision sales, versus 53% a year earlier; older hydrogel products declined.
- CooperSurgical growth reflected acquisitions and product performance. Fertility sales rose 24%, partly from Reprogenetics and Research Instruments; office and surgical procedure sales rose 7%.
- On December 17, 2015, CooperSurgical acquired Research Instruments for approximately $53.1 million in cash ($49.5 million net of cash acquired). Its preliminary purchase accounting included $35.0 million of goodwill. The acquisition’s pro forma results were not presented because management considered the impact immaterial.
- Q1 results included restructuring, acquisition, and integration costs, product-rationalization expenses, new-facility start-up costs, and $16.2 million of intangible amortization. The filing identifies $10.5 million of Sauflon-related production-asset disposals and accelerated depreciation in cost of sales. Management expects remaining Sauflon manufacturing-related costs through the end of FY2016.
- The effective tax rate was a 2.0% benefit, versus an 8.5% provision rate in the prior-year quarter. Management attributed the change mainly to a release of prior-year tax reserves, a UK statutory tax-rate reduction, and the retroactive extension of the R&D tax credit.
- After quarter-end, on March 1, 2016, Cooper entered into a new credit agreement with a $1.0 billion revolving facility and an $830 million term loan, both maturing March 1, 2021. It used new-term-loan proceeds to repay the $200 million uncommitted lines and borrowings under the previous revolving agreement. Existing term loans were amended to align certain covenants with the new facility.
Outlook, risks, and contingencies
- Management expressed long-term optimism about contact-lens and women’s-healthcare markets, but gave no quantified FY2016 revenue or earnings guidance in the filing. It planned further investment in single-use lens manufacturing capacity to meet expected demand for clariti and MyDay products.
- Management cited global-market uncertainty, currency and commodity volatility, healthcare-industry consolidation, and the Affordable Care Act as factors that could affect performance during the remainder of FY2016. Other identified risks include acquisition integration and leverage, manufacturing or supply interruptions, regulatory changes, product acceptance and recalls, litigation, and foreign-exchange and interest-rate movements.
- More than 50 putative consumer class actions alleging price-fixing related to contact-lens unilateral pricing policies had been consolidated in federal court. CooperVision denied the allegations and intended to defend the claims; the company said it could not assess the likelihood or estimate a potential loss.
- CooperVision paid $17.0 million in July 2015 to settle patent disputes with JJVC through cross-licenses and covenants not to sue; neither party admitted liability. The filing reported no material change to risk factors since the FY2015 10-K.
Investor verification points
- Assess whether reported sales and margins reflect underlying demand or are materially affected by foreign exchange, product mix, and Sauflon restructuring and start-up costs.
- Verify the ongoing performance and integration of Research Instruments and Reprogenetics, including their contribution to CooperSurgical growth and margins.
- Review the new $1.0 billion revolving facility and $830 million term loan, refinancing effects, debt maturity profile, and covenant headroom.
- Monitor cash generation, inventory levels, planned capacity investment, and the company’s expectation to keep foreign subsidiary earnings and cash invested abroad.
- Track developments in the contact-lens class actions; the filing does not provide a clear estimate of potential loss.