Cooper Companies, Inc. — Q1 FY2021 10-Q
Reporting period: Three months ended January 31, 2021, compared with the three months ended January 31, 2020. The company operates CooperVision, a contact-lens business, and CooperSurgical, focused on women’s health and fertility.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $680.5 million | $646.2 million | +5% |
| Gross profit / margin | $450.7 million / 66% | $426.5 million / 66% | Profit +6%; margin flat |
| Operating income / margin | $133.4 million / 20% | $111.1 million / 17% | +20% |
| Net income | $2,101.1 million | $90.5 million | Primarily tax benefit |
| Diluted EPS | $42.31 | $1.82 | Primarily tax benefit |
| Operating cash flow | $147.7 million | $129.7 million | +$18.0 million |
| Free cash flow | $91.8 million | $60.7 million | +51% |
Revenue increased in both segments: CooperVision sales rose 4% to $507.0 million, while CooperSurgical rose 8% to $173.5 million. CooperSurgical operating income was $17.5 million versus $1.7 million, reflecting higher sales and lower SG&A and R&D; CooperVision operating income rose 4% to $127.5 million. Consolidated interest expense declined 45% to $6.4 million, primarily due to lower rates and average debt.
Liquidity, debt and capital
- Cash and cash equivalents were $119.1 million at January 31, 2021. Working capital was $336.3 million.
- Total debt was $1,814.6 million, versus $1,793.2 million at October 31, 2020. The company had $724.6 million available under its revolving facility.
- The $350 million term loan matures October 15, 2021; the $850 million term loan and revolving facility mature April 1, 2025. The company reported compliance with debt covenants and expects to meet obligations and remain compliant for at least 12 months.
- Operating cash flow less $55.9 million of capital expenditures produced $91.8 million of free cash flow. Investing cash outflow was $135.7 million, including $79.8 million for acquisitions and other items.
- The company repurchased 69,622 shares for $24.8 million and paid a $0.03-per-share semiannual dividend after quarter-end.
Material changes and unusual items
- Tax-driven earnings: A November 2020 intra-group transfer of intellectual property and related assets to a UK subsidiary created a $1,987.9 million deferred tax asset and a corresponding income tax benefit. The reported tax benefit was $1,961.6 million; the effective tax rate was (1,406.3)%. Consequently, reported net income and EPS are not representative of underlying operating performance.
- Acquisitions: CooperVision acquired the remaining interests in a myopia-management spectacle-lens company; the remeasurement of its prior investment produced an $11.5 million gain. The acquisition includes contingent payments with an undiscounted range up to $139.1 million. CooperSurgical also acquired an IVF cryo-storage software company. Purchase-price allocations were preliminary.
- Subsequent event: On February 2, 2021, CooperVision agreed to sell 50% of the acquired myopia-management business, subject to regulatory approval, with the intent to operate it as a joint venture.
- Foreign exchange positively affected reported sales; CooperVision sales grew 1% in constant currency and CooperSurgical sales grew 7% in constant currency. Silicone hydrogel products represented 77% of CooperVision sales, up from 73%.
Outlook, management commentary and risks
Management remained optimistic about the long-term prospects of the contact-lens and general healthcare markets but provided no specific numerical guidance in the filing. It warned that COVID-19-related restrictions and reduced patient visits may continue to pressure sales, cash flow and performance. The company reported no significant manufacturing, supply or distribution disruption to date, but cited higher unabsorbed overhead, labor inefficiencies, production costs and freight charges.
Other cited risks include foreign-exchange and interest-rate volatility, LIBOR transition uncertainty, UK-EU regulatory and trade changes, supply-chain disruption, healthcare regulation, product and litigation exposure, and acquisition integration and contingent-payment risks. The company said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Assess operating trends separately from the one-time tax benefit and acquisition-related investment gain; confirm subsequent tax-asset realization and related tax assumptions.
- Monitor organic and constant-currency growth, segment margins, COVID-19 impacts, and the mix and performance of silicone hydrogel products.
- Review the preliminary acquisition accounting, contingent consideration valuations, and conditions and approval status for the planned 50% sale.
- Track debt, covenant headroom, and repayment or refinancing of the $350 million term loan due October 2021, as well as LIBOR transition exposure.
- Evaluate inventory levels, working-capital movements, and whether operating cash flow and free cash flow remain sustainable.