The Cooper Companies, Inc. — Q1 FY2018 10-Q
Reporting period: Three months ended January 31, 2018. Unaudited results; comparisons are with the three months ended January 31, 2017, unless otherwise noted. The company operates CooperVision, which sells contact lenses, and CooperSurgical, focused on women’s health, fertility and related products and services.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $590.0 million | $499.1 million |
| Gross profit / margin | $370.9 million / 63% | $312.4 million / 63% |
| Operating income / margin | $90.2 million / 15% | $90.7 million / 18% |
| Interest expense | $18.4 million | $7.3 million |
| Income before taxes | $74.8 million | $80.1 million |
| Income tax provision | $197.3 million | $4.3 million |
| Net income (loss) attributable to Cooper stockholders | $(122.5) million | $75.8 million |
| Diluted EPS | $(2.50) | $1.53 |
| Cash from operating activities | $26.2 million | $108.4 million |
Sales increased 18%. CooperVision sales rose 14% to $444.8 million; CooperSurgical sales rose 32% to $145.2 million, primarily reflecting the PARAGARD acquisition. CooperVision operating income increased to $112.3 million from $87.3 million; CooperSurgical reported an operating loss of $9.3 million versus income of $16.4 million, reflecting acquisition-related costs and investment. Consolidated operating income was nearly flat as a result.
At January 31, 2018, cash was $91.7 million, working capital was $759.8 million, and total debt was $2,402.5 million, up from $1,172.7 million at October 31, 2017. The debt-to-equity ratio was 0.76:1, compared with 0.37:1. The company had $874.7 million available under its revolving credit facility and reported compliance with debt covenants: total leverage ratio 2.68:1 (maximum 3.75:1) and interest coverage ratio 19.42:1 (minimum 3.00:1).
Operating cash flow fell by $82.2 million, principally due to a larger outflow from operating capital, including acquisition-related receivables and a $42.0 million payment to U.K. tax authorities. Investing cash outflow was $1,244.6 million, including $1,193.2 million for acquisitions and $51.4 million of capital expenditure. Financing cash inflow was $1,217.4 million, mainly from debt proceeds.
Material changes and unusual items
- The November 1, 2017 PARAGARD asset acquisition from Teva cost approximately $1.1 billion. The company funded acquisitions with borrowings; the purchase accounting included a $1,061.9 million composite intangible asset to be amortized over 15 years. Paragon Vision Sciences and Blueyes were also acquired during the quarter.
- The Tax Cuts and Jobs Act drove a provisional $202.0 million tax charge, including a $177.9 million transition-tax estimate, $13.2 million for remeasurement of deferred taxes, and provisional state and withholding tax amounts. The company had not completed its accounting; estimates could be materially revised. The reported effective tax rate was 263.7%.
- PARAGARD-related inventory step-up of $16.9 million, integration costs of $5.1 million, and increased amortization weighed on CooperSurgical’s gross margin and operating results. CooperVision also recorded $5.6 million of costs, primarily related to Hurricane Maria’s impact on its Puerto Rico facility and other manufacturing costs.
- Foreign exchange positively affected CooperVision sales by $20.4 million. Silicone hydrogel products grew 22% and represented 67% of CooperVision sales, versus 63% in the prior-year period.
- The company paid approximately GBP 31.0 million to the U.K. tax authorities following a Diverted Profits Tax charging notice concerning a past intellectual-property transfer. It intends to contest the notice; the outcome is uncertain and may adversely affect financial condition or results.
Outlook, liquidity and risks
Management expressed optimism about the long-term prospects of contact-lens and general-health-care markets, but provided no quantified earnings or revenue guidance in the supplied filing text. It cited market uncertainty, foreign-exchange volatility, Brexit-related uncertainty and health-care industry consolidation as risks. Management expects available cash, cash flows and financing resources to meet anticipated needs for at least 12 months, while noting that additional financing, if needed, may not be available on favorable terms or at all.
Key risks include acquisition integration and realization of expected benefits, increased and variable-rate debt, foreign-currency and interest-rate movements, supply-chain or manufacturing disruptions, product recalls and regulatory or reimbursement issues, litigation, and information-system implementation or cybersecurity disruptions. Management said disclosure controls were effective; it was still evaluating internal controls at the newly acquired PARAGARD business.
Important facts for investors to verify
- How much of reported sales growth reflects acquisitions, foreign exchange and underlying organic demand.
- The final tax-reform accounting, including the transition-tax estimate and the effect of future tax-law provisions.
- PARAGARD integration, inventory step-up, amortization and the acquired asset’s valuation and useful life.
- Debt reduction, covenant headroom and sensitivity to interest rates; a 1 percentage-point rate change was estimated to change quarterly interest expense by approximately $6.0 million.
- The outcome of the U.K. tax dispute and the pending court approval of the contact-lens pricing-policy settlement.