Cooper Companies, Inc. (NYSE: COO) — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended April 30, 2021. Financial statements are unaudited. The company operates CooperVision, a contact lens business, and CooperSurgical, focused on women’s health and fertility.
Financial performance
| Metric | Three months ended Apr. 30 | Six months ended Apr. 30 |
|---|---|---|
| Net sales | $719.5 million; +37% year over year | $1.400 billion; +20% |
| Gross profit / margin | $487.1 million / 68%, versus $323.5 million / 62% | $937.8 million / 67%, versus $750.0 million / 64% |
| Operating income / margin | $143.2 million / 20%, versus $28.6 million / 5% | $276.6 million / 20%, versus $139.7 million / 12% |
| Net income | $117.5 million, versus $11.5 million | $2.219 billion, versus $102.0 million |
| Diluted EPS | $2.36, versus $0.23 | $44.65, versus $2.05 |
| Operating cash flow | $192.6 million, versus $25.8 million | $340.3 million, versus $155.5 million |
| Free cash flow | $142.7 million, versus negative $63.5 million | $234.5 million, versus negative $2.8 million |
Free cash flow is a non-GAAP measure defined as operating cash flow less capital expenditures. The reported six-month net income and EPS are dominated by a one-time tax benefit: a November 2020 intra-group transfer of intellectual property generated a $1,987.9 million deferred tax asset and corresponding income tax benefit. The six-month income tax benefit was $1,942.7 million; therefore, six-month net income and EPS are not representative of underlying operating performance. Q2 net income was $117.5 million and diluted EPS was $2.36.
Q2 revenue grew across both segments: CooperVision sales were $522.6 million (+30%) and CooperSurgical sales were $196.9 million (+60%). For the six months, sales were $1,029.6 million (+16%) and $370.4 million (+31%), respectively. Management attributed growth mainly to recovering demand, product volume and, in CooperVision, favorable currency. Q2 foreign exchange added approximately $21.5 million to CooperVision sales and $3.0 million to CooperSurgical sales.
Liquidity, debt and capital
- Cash and cash equivalents were $105.9 million at April 30, 2021, down from $115.9 million at October 31, 2020. Working capital was $329.9 million.
- Total debt was $1,737.5 million, down from $1,793.2 million at fiscal year-end. Debt-to-equity was 0.28:1, compared with 0.47:1.
- The company had $813.6 million available under its revolving credit facility. A separate $350 million term loan matures October 15, 2021; the $850 million term loan and revolving facility mature April 1, 2025.
- At April 30, the company reported covenant ratios of 1.78:1 total leverage and 36.81:1 interest coverage, within required limits of no more than 3.75:1 and at least 3.00:1. Management expects covenant compliance and sufficient liquidity for at least 12 months after issuance.
- Six-month investing cash outflow was $276.7 million, including $170.9 million for acquisitions and other items and $105.8 million in capital expenditures. Financing activities used $79.0 million. The company repurchased $24.8 million of shares in the first quarter; none in Q2. It paid a $0.03-per-share semiannual dividend.
Material changes and unusual items
- Sales rebounded from the prior-year pandemic-affected period. Management cited higher lens volumes and reopened healthcare facilities; reported growth also includes favorable foreign exchange.
- Gross margin improved to 68% in Q2, primarily from product mix and favorable currency. Operating income increased substantially in both segments as sales recovered.
- The $1,987.9 million tax benefit from the UK intellectual-property transfer drove the extraordinary six-month earnings increase and raised deferred tax assets to $2,017.4 million from $80.1 million at October 31, 2020.
- Other six-month income included an $11.5 million gain from remeasuring a prior investment upon acquisition. The company completed multiple acquisitions across contact lenses, medical devices and IVF-related services; purchase-price allocations for certain deals remained preliminary. Contingent consideration liabilities totaled $30.8 million at April 30.
- Inventory was $582.0 million, up from $570.4 million; inventory on hand rose to 7.5 months from 6.6 months. Management cited higher sales and inventory prepared for future product launches.
Outlook, commentary and risks
Management expressed optimism about the long-term prospects of contact lenses and general healthcare but gave no quantified sales, earnings or cash-flow guidance in the supplied filing text. It warned that COVID-19 restrictions and uncertainty may continue to pressure demand, sales, cash flow and performance. Management reported no significant manufacturing, supply or distribution interruption to date, but cited higher freight, production costs, labor inefficiencies and unabsorbed fixed overhead.
Key risks include further pandemic disruption; foreign-exchange and variable-rate interest exposure; LIBOR transition for material contracts, whose impact the company could not yet estimate; acquisition integration, contingent payments and financing; UK/EU regulatory and supply-chain uncertainty; trade barriers and tariffs; product, regulatory, reimbursement, litigation, cybersecurity and raw-material supply risks. The company had $1.1 billion of interest-rate swaps outstanding and estimated that a 1% rate change would change quarterly interest expense by approximately $1.3 million, after swaps.
The company said ordinary-course legal proceedings were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate recurring operating performance from the one-time $1,987.9 million tax benefit when assessing six-month net income and EPS.
- Check how much revenue growth reflects demand recovery, acquisitions and foreign-exchange effects, and whether demand normalizes after pandemic-related comparisons.
- Monitor repayment or refinancing of the $350 million term loan due October 15, 2021, as well as covenant headroom and revolver availability.
- Track integration and final purchase-price allocations for recent acquisitions, including potential contingent consideration payments.
- Follow inventory levels, production and freight costs, and the duration of COVID-19 and UK/EU or LIBOR-related impacts.