Cooper Companies, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. The company operates CooperVision (contact lenses) and CooperSurgical (women’s health, fertility and related products).
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $654.3 million | $631.3 million | $1,282.4 million | $1,221.3 million |
| Gross profit / margin | $432.6 million / 66% | $404.5 million / 64% | $851.1 million / 66% | $775.4 million / 63% |
| Operating income / margin | $146.9 million / 22% | $74.7 million / 12% | $257.8 million / 20% | $164.8 million / 13% |
| Net income (loss) | $122.4 million | $60.9 million | $225.5 million | $(61.6) million |
| Diluted EPS | $2.45 | $1.23 | $4.52 | $(1.26) |
| Cash from operating activities | $214.8 million | $170.8 million | $316.6 million | $197.1 million |
- Quarterly sales rose 4%; first-half sales rose 5%. CooperVision sales increased 4% in Q2 and 5% in the first half; CooperSurgical increased 4% and 6%, respectively.
- Growth in CooperVision was led by single-use spherical lenses and silicone hydrogel products. Silicone hydrogel products represented 71% of sales in both 2019 periods, versus 68% in the comparable 2018 periods. Foreign exchange reduced CooperVision sales by about $22.3 million in Q2 and $35.6 million in the first half.
- CooperSurgical’s office and surgical sales rose 8% in both periods. Fertility sales fell 2% in Q2 but grew 3% for the first half; Q2 was affected by the exit from carrier screening and non-invasive prenatal testing product lines.
- For the six months, investing cash outflow was $182.7 million, including $131.9 million of capital expenditures and $50.8 million for acquisitions and other items. Financing cash outflow was $108.7 million. Operating cash flow less capital expenditures was $184.7 million.
Balance sheet, debt and liquidity
- At April 30, cash and cash equivalents were $104.6 million; total debt was $1,926.9 million, compared with $2,022.8 million at October 31, 2018. Long-term debt was $1,472.3 million and short-term debt $454.6 million.
- Working capital was $195.7 million, down from $554.4 million at fiscal year-end, primarily reflecting the $400 million term loan due October 31, 2019 being classified as short-term debt. The company reported $999.5 million available under its revolving credit facility.
- The company said cash, cash equivalents and expected operating cash flows should meet anticipated needs for at least 12 months from issuance of the statements. It was in compliance with debt covenants: total leverage ratio 1.99:1 versus a 3.75:1 maximum; interest coverage ratio 11.17:1 versus a 3.00:1 minimum.
- Debt is substantially exposed to variable interest rates. Management estimated a 1 percentage-point rate change would change quarterly interest expense by approximately $5.0 million, based on average second-quarter debt outstanding.
Material changes, outlook and notable items
- Operating income and EPS improved substantially year over year. The comparison benefited from the absence of the prior-year $24.4 million CooperSurgical intangible impairment and PARAGARD inventory step-up charges ($18.4 million in Q2 2018 and $35.4 million in the first half of 2018). The prior-year first half also included a $202.0 million provisional tax charge related to U.S. tax legislation, contributing to the reported loss.
- Q2 2019 results included a $19.0 million gain from selling the U.S. exclusive distribution right for the Filshie Clip System for $21.0 million. The company had agreed to early termination of the distribution arrangement.
- Management expressed optimism about long-term contact lens and general health care markets, citing product innovation, market penetration and acquisitions. No specific numerical revenue or earnings guidance is provided in the filing text.
- Management identified risks including foreign-exchange and interest-rate volatility, global trade barriers and tariffs, Brexit-related uncertainty, tax-law changes, acquisition integration and leverage, supply-chain disruption, regulation, product acceptance and recalls, litigation, and reimbursement and competitive pressures.
- Two fiscal 2019 acquisitions—Incisive Surgical and Blanchard Contact Lenses—had preliminary purchase-price allocations. The company adopted ASC 606 without a material reported impact; it expects lease accounting adoption in fiscal 2020 to materially affect the balance sheet, but not materially affect the income statement.
- A $3.0 million settlement payment in a contact-lens pricing class action was placed in escrow; final court approval remained outstanding. The company stated that other ordinary-course legal matters were not expected to have a material adverse effect.
Investor verification priorities
- Assess the sustainability of earnings growth after adjusting for the $19.0 million sale gain, prior-year impairment and inventory step-up charges, and the prior-year tax charge.
- Review the $400 million term loan maturity on October 31, 2019, refinancing plans, variable-rate exposure and covenant headroom.
- Track foreign-exchange effects, CooperVision product mix and growth, and CooperSurgical fertility trends following the discontinued product lines.
- Monitor acquisition integration and completion of preliminary purchase-price allocations, as well as the final approval status of the contact-lens class-action settlement.
- Evaluate working-capital and inventory trends, capital spending, and the balance-sheet effects of the upcoming lease-accounting standard.