Business context and reporting period
The Cooper Companies, Inc. filed this unaudited Form 10-Q for the three months ended January 31, 2019, its first quarter of fiscal 2019. Its two principal businesses are CooperVision, which sells contact lenses, and CooperSurgical, which serves women’s health, fertility, diagnostics and surgical markets.
Financial performance and condition
| Metric | Q1 FY2019 | Q1 FY2018 or comparison |
|---|---|---|
| Net sales | $628.1 million | $590.0 million; up 6% |
| Gross profit / margin | $418.5 million / 67% | $370.9 million / 63% |
| Operating income / margin | $110.9 million / 18% | $90.2 million / 15% |
| Net income (loss) | $103.2 million | $(122.5) million |
| Diluted EPS | $2.07 | $(2.50) |
| Interest expense | $18.2 million | $18.4 million |
| Operating cash flow | $101.8 million | $26.2 million |
| Capital expenditures | $79.2 million | $51.4 million |
Cash and cash equivalents were $146.6 million at January 31, 2019, versus $77.7 million at October 31, 2018. Working capital was $254.4 million, down from $554.4 million. Total debt was $2,132.4 million, compared with $2,022.8 million at fiscal year-end; $859.5 million remained available under the revolving credit facility. The company reported compliance with debt covenants: leverage ratio 2.25:1 against a maximum of 3.75:1, and interest coverage 10.70:1 against a minimum of 3.00:1. Management said cash and expected operating cash flows should meet anticipated needs for at least 12 months.
CooperVision sales were $470.1 million, up 6%; CooperSurgical sales were $158.0 million, up 9%. CooperVision operating income was $116.3 million versus $112.3 million; CooperSurgical operating income was $7.2 million versus a $9.3 million loss.
Material changes versus the prior comparable period
- Sales growth was led by CooperVision single-use sphere lenses, up 14%, and by growth in both CooperSurgical office/surgical and fertility products, each up 9%. Foreign exchange reduced CooperVision sales by $13.3 million.
- Consolidated gross margin improved four percentage points. CooperSurgical’s margin rose to 69% from 54%, partly because Q1 FY2018 included $16.9 million of PARAGARD inventory step-up charges. Q1 FY2019 CooperSurgical gross profit included $4.2 million of acquisition, integration and manufacturing costs.
- Net income comparisons are heavily affected by tax items: Q1 FY2018 included a $202.0 million provisional tax charge related to the 2017 U.S. tax law. Q1 FY2019 recorded a 10.0% effective tax benefit rate, including $18.7 million of discrete tax benefits. The filing reports a 263.7% tax expense rate for Q1 FY2018.
- Operating cash flow increased, while investing cash outflow fell substantially year over year, principally because Q1 FY2018 included the $1.1 billion PARAGARD acquisition. Q1 FY2019 capital spending increased, primarily for manufacturing capacity expansion.
Outlook, commentary, risks and unusual items
Management expressed optimism about long-term prospects in contact lenses and general health care, but provided no quantified quarterly or full-year guidance in the supplied filing text. It highlighted continued investment in newer contact lens products, market expansion, and CooperSurgical’s women’s health and fertility portfolio. Q1 acquisitions included Incisive Surgical and Blanchard Contact Lenses; their purchase-price allocations were preliminary.
Key risks cited include foreign-exchange and interest-rate volatility, variable-rate debt, Brexit and trade barriers, supply-chain or manufacturing disruptions, regulation and reimbursement, product acceptance or recalls, litigation, acquisition integration and financing, and cybersecurity/privacy obligations. A 364-day $400 million term loan matures October 31, 2019. A 1% change in interest rates was estimated to change quarterly interest expense by approximately $5.3 million, based on average Q1 debt.
More than 50 putative consumer class actions concerning contact-lens pricing were settled by CooperVision for $3.0 million, paid into escrow; final court approval remained outstanding. Subsequent events: on February 1, 2019, CooperSurgical agreed to end its exclusive U.S. distribution agreement for the Filshie Clip System; the company had received $21 million from the counterparty on January 31 and the counterparty agreed to buy back resaleable inventory. On February 26, the company received a roughly $29 million U.K. tax refund related to a prior diverted-profit-tax payment of approximately $42 million.
The company adopted ASC 606 in Q1 FY2019 with no material reported impact. Adoption of the new lease standard was expected to materially affect the balance sheet through recognition of operating-lease assets and liabilities, but not materially affect the income statement.
Important facts for investors to verify
- Whether reported sales and margin growth persist after accounting for foreign exchange, product mix, and acquisition-related costs.
- The sustainability of earnings and cash flow after separating recurring performance from the unusually large prior-year tax charge and current-period discrete tax benefits.
- Debt repayment and refinancing plans for the $400 million term loan maturing October 31, 2019, and sensitivity to variable interest rates.
- Final purchase-price allocations and integration results for the recent acquisitions, and the timing and accounting treatment of the Filshie agreement termination and U.K. tax refund.
- Final court approval and any remaining exposure from the contact-lens pricing settlement.