The Cooper Companies, Inc. — Fiscal Q1 2017 10-Q
Business context and period. The company is a global medical-device business operating through CooperVision (contact lenses) and CooperSurgical (women’s health, fertility and diagnostics). This unaudited report covers the three months ended January 31, 2017, compared with the three months ended January 31, 2016. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $499.1 | $449.6 | +11% |
| Gross profit / gross margin | $312.4 / 63% | $262.0 / 58% | +19% |
| Operating income / operating margin | $90.7 / 18% | $57.4 / 13% | +58% |
| Net income attributable to Cooper stockholders | $75.8 | $51.4 | +47% |
| Diluted EPS | $1.53 | $1.05 | +$0.48 |
| Cash from operating activities | $108.4 | $89.5 | +$18.9 |
| Capital expenditures | $28.7 | $45.1 | -$16.4 |
CooperVision sales rose 7% to $389.3; CooperSurgical sales rose 29% to $109.8. CooperVision silicone-hydrogel products grew 17% and represented 63% of CooperVision sales, versus 57% a year earlier. CooperSurgical fertility sales increased 83% to $56.8, primarily reflecting acquired businesses; office and surgical sales declined 2% to $53.0.
Net income was $75.8 versus $51.7 in the prior year, which included $0.3 attributable to noncontrolling interests. The effective tax rate was 5.4%, versus a 2.0% tax benefit in Q1 2016. Other comprehensive income included a $28.2 foreign-currency translation gain, compared with a $113.8 loss in the prior-year quarter.
Balance sheet, cash flow and liquidity
- At January 31, 2017, cash was $91.1, working capital was $366.0, and total debt was $1,424.5, compared with $100.8, $393.9 and $1,333.8, respectively, at October 31, 2016. Debt-to-equity was 0.51:1.
- Operating cash flow was $108.4. Investing activities used $202.1, including $173.4 for acquisitions, primarily Wallace, and $28.7 for capital expenditures. Financing activities provided $83.5; cash declined $9.7 to $91.1.
- The company reported $902.8 available under its revolving credit facility. It was in compliance with debt covenants: total leverage ratio 2.02:1 against a maximum 3.75:1, and interest coverage ratio 23.46:1 against a minimum 3.00:1.
- A $207.0 balance on the 2014 term loan was due to mature August 4, 2017; $285.0 remained outstanding on a term loan maturing in September 2018. Management said cash, operating cash flow and borrowing capacity should fund operations and anticipated needs, while noting additional debt financing could be sought depending on the scale or timing of business activities.
Changes, outlook and notable items
- On November 4, 2016, CooperSurgical acquired Wallace, an IVF business, for approximately $167.4 cash. Preliminary purchase accounting included $72.2 of identifiable intangible assets and $94.8 of goodwill. Management said acquisitions support expansion of fertility and diagnostics offerings.
- Management attributed stronger operating income and gross margin partly to higher sales and product mix, and to the absence of prior-year Sauflon restructuring and integration costs. Q1 2017 included $0.6 of new-facility start-up costs and $0.7 of integration costs in cost of sales, $3.7 of acquisition and integration expenses, $1.3 of legal and lobbying costs, and $16.8 of intangible amortization.
- No specific quantitative full-year guidance was provided. Management remained optimistic about long-term contact-lens and healthcare markets, but cited global-market uncertainty, foreign-currency volatility, Brexit-related uncertainty and healthcare-industry consolidation as risks for the remainder of fiscal 2017. It expects demand growth for certain silicone-hydrogel and single-use lens products.
- Foreign exchange had a net negative $7.1 impact on CooperVision sales. Interest expense increased to $7.3 from $5.3, reflecting higher average debt and interest rates. Inventory was $421.4, and inventory months on hand rose to 6.8 from 5.6 at October 31, 2016 (6.7 after the stated prior-period adjustment).
- The company recorded a $4.1 net cumulative decrease to opening retained earnings for an understatement of prior-year rebate accruals, primarily accumulated before fiscal 2014. It judged prior-period income statements and cash flows minimally affected and not materially misstated; the October 31, 2016 balance sheet was revised.
- Early adoption of share-based-payment accounting guidance produced a $17.9 deferred-tax-asset and retained-earnings adjustment at November 1, 2016, plus a $4.8 discrete income-tax benefit in the quarter. Deferred taxes were also prospectively reclassified as noncurrent.
- More than 50 putative class actions allege contact-lens pricing-policy antitrust violations. Claims are in discovery; the company denies the allegations and said a loss was not probable and a potential loss range was not reasonably estimable. Other legal matters also exist, with no estimate of possible loss available.
Important facts for investors to verify
- How much of sales and earnings growth is sustainable from underlying demand versus acquisitions, product mix and prior-year restructuring comparisons.
- Wallace integration, final purchase-price allocation, acquired-product margins and the returns on recent fertility and diagnostics acquisitions.
- Repayment or refinancing plans for the $207.0 term loan maturing in August 2017, alongside leverage, interest costs and covenant headroom.
- Inventory growth, foreign-exchange exposure and the effect of future currency or interest-rate movements.
- Developments in the contact-lens pricing litigation and any change in the company’s assessment of potential loss.
- The recurring contribution of share-based-payment tax benefits to the reported effective tax rate and earnings.