Business context and reporting period
The Cooper Companies, Inc. (Cooper) is a global medical-device company operating through CooperVision, which sells contact lenses, and CooperSurgical, which sells women’s-health, fertility and diagnostic products and services. This unaudited Form 10-Q covers the fiscal second quarter and six months ended April 30, 2017; comparisons are with the corresponding 2016 periods.
Financial results and liquidity
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales | $522.4 million, up 8% from $483.8 million | $1,021.5 million, up 9% from $933.4 million |
| Gross profit / margin | $343.9 million / 66%; prior year $298.5 million / 62% | $656.2 million / 64%; prior year $560.5 million / 60% |
| Operating income / margin | $117.1 million / 22%; prior year $89.8 million / 19% | $207.8 million / 20%; prior year $147.2 million / 16% |
| Net income attributable to Cooper stockholders | $104.9 million; prior year $74.1 million | $180.7 million; prior year $125.5 million |
| Diluted EPS | $2.12; prior year $1.52 | $3.65; prior year $2.57 |
For the six months, operating cash flow was $240.1 million, versus $187.4 million. Investing used $231.1 million, including $173.8 million for acquisitions and $57.3 million for capital expenditures; financing provided $10.0 million. Second-quarter operating cash flow was $131.6 million, versus $97.8 million.
At April 30, cash was $121.3 million, working capital $615.1 million, and total debt $1,386.9 million (versus $1,333.8 million at October 31, 2016). The company had $754.8 million available on its revolving facility and was within debt covenants: total leverage ratio 1.87:1 versus a 3.75:1 maximum, and interest coverage 23.95:1 versus a 3.00:1 minimum. In May 2017, it repaid the remaining $285.0 million balance on a 2013 term loan. Inventory was $437.6 million; inventory months on hand rose to 7.4 from 5.6 at October 31, while days sales outstanding improved to 51 from 53.
Material changes versus the prior comparable period
- CooperVision sales rose 4% in the quarter and 6% in the half year; CooperSurgical sales rose 23% and 26%, respectively. CooperSurgical growth was primarily from acquired fertility products and services; office and surgical sales were nearly flat.
- CooperVision’s silicone-hydrogel products grew 15% in the quarter and accounted for 66% of its sales, up from 60%. Growth in toric and single-use lenses was partly offset by declines in older hydrogel products.
- CooperVision margins benefited from product mix, currency effects on costs and the absence of prior-year Sauflon restructuring and integration charges. CooperSurgical margins were pressured by lower-margin acquired products and higher acquisition-related amortization and operating costs.
- The company acquired Wallace, Smiths Medical’s IVF segment, for approximately $167.4 million in cash in November 2016. First-half acquisition cash payments were $173.8 million.
- Foreign exchange reduced CooperVision sales by $10.8 million in the quarter and $17.9 million in the first half. First-half interest expense increased to $15.0 million from $12.9 million.
Outlook, commentary, risks and unusual items
Management expressed optimism about long-term contact-lens and health-care markets but provided no specific numerical revenue or earnings guidance in the supplied filing text. It cited continued product launches, market expansion and acquisitions as growth priorities, especially in silicone-hydrogel lenses and CooperSurgical fertility offerings. It expects available cash, operating cash flow and credit capacity to fund operations and anticipated capital needs, while noting that additional debt financing may be sought depending on the timing and scale of activities.
- Quarter results included $3.6 million of acquisition and integration expenses, $1.8 million of legal and lobbying costs, $0.7 million of CooperSurgical integration costs in cost of sales, and $16.7 million of intangible amortization. First-half results included $7.3 million of acquisition and integration expenses, $3.1 million of legal and lobbying costs, and $33.4 million of amortization.
- The first-half effective tax rate was 4.7% versus 5.4%, reflecting geographic income mix and a $7.3 million discrete tax benefit from excess share-based compensation tax benefits. Early adoption of the related accounting standard also increased deferred tax assets and opening retained earnings by $17.9 million.
- The company recorded a $4.1 million after-tax opening retained-earnings adjustment for previously understated rebate accruals, concluding prior-period statements were not materially misstated.
- More than 50 putative class actions allege contact-lens manufacturers and others conspired over resale prices under unilateral pricing policies. Discovery was ongoing and plaintiffs sought class certification. CooperVision denies the allegations; management said loss was not probable and a potential loss range was not reasonably estimable.
- Key risks include foreign-exchange and interest-rate movements, acquisition integration and leverage, raw-material supply disruptions, regulatory and reimbursement changes, product acceptance or recalls, and litigation. The filing reported no material change to previously disclosed risk factors. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether reported sales and margin gains persist after excluding the favorable comparison with prior-year restructuring costs and considering foreign-exchange effects.
- How Wallace and other acquisitions contribute to organic growth, profitability and cash generation, given CooperSurgical’s lower margins and integration costs.
- Debt levels, interest costs, covenant headroom and the effects of the May 2017 repayment on available borrowing capacity.
- Inventory growth and elevated months on hand, along with the company’s ability to convert inventory and receivables into cash.
- Developments in the contact-lens pricing litigation, including class certification and any change in the company’s ability to estimate potential exposure.