Business context and reporting period
The Cooper Companies, Inc. (NYSE: COO) filed this unaudited Form 10-Q for the fiscal quarter and six months ended April 30, 2016. The company operates CooperVision, which sells contact lenses, and CooperSurgical, which sells women’s health and fertility products and services.
Financial performance
| Metric | Three months ended April 30, 2016 | Year-over-year | Six months ended April 30, 2016 | Year-over-year |
|---|---|---|---|---|
| Net sales | $483.8 million | +11% | $933.4 million | +6% |
| Gross profit / margin | $298.5 million / 61.7% | +11% / broadly flat | $560.5 million / 60.0% | +3% / down from 61.8% |
| Operating income / margin | $89.8 million / 18.6% | +27% / up from 16.3% | $147.2 million / 15.8% | +2% / down slightly from 16.4% |
| Net income attributable to Cooper stockholders | $74.1 million | Up from $60.7 million | $125.5 million | Up from $121.9 million |
| Diluted EPS | $1.52 | Up from $1.23 | $2.57 | Up from $2.48 |
Second-quarter sales growth came from both businesses: CooperVision sales rose 9% to $391.2 million, and CooperSurgical rose 23% to $92.6 million. CooperSurgical fertility sales increased 60% to $40.3 million, reflecting recent acquisitions. CooperVision silicone hydrogel products represented 60% of its quarterly sales, up from 55%.
For the first six months, operating cash flow was $187.4 million, versus $190.5 million. Capital expenditures were $86.3 million, versus $118.4 million; investing cash outflow was $231.8 million, including $145.4 million for acquisitions. Cash was $44.5 million at April 30, 2016, and working capital was $592.9 million. Total debt was $1.441 billion, up from $1.349 billion at October 31, 2015; debt-to-equity was 0.53:1. The company reported about $1.0 billion available on its revolving facility.
Material changes versus prior periods
- Second-quarter operating income and diluted EPS grew faster than sales; first-half operating income growth was modest and gross margin declined by about 1.8 percentage points.
- First-half interest expense increased to $12.9 million from $8.6 million, reflecting higher average debt. The first-half effective tax rate fell to 5.4% from 8.6%, primarily due to a release of prior-year tax reserves, a UK tax-rate reduction, and the retroactive R&D tax credit.
- On March 1, 2016, Cooper refinanced credit arrangements with a new $1.0 billion revolving facility and an $830 million term loan, maturing in 2021. It repaid prior revolving borrowings and partially repaid existing term loans. At quarter-end, covenant ratios were compliant: leverage 2.37:1 against a maximum 3.75:1 and interest coverage 26.42:1 against a minimum 3.00:1.
- First-half acquisitions included Genesis Genetics, The Pipette Company, and Research Instruments. Subsequent to quarter-end, CooperSurgical acquired Kivex Biotec for about $11.5 million, Recombine’s commercial assets for about $85 million, and Reprogenetics UK for about $12 million.
Outlook, commentary, risks, and unusual items
Management gave no specific full-year numerical revenue or earnings guidance. It expressed optimism about the long-term contact lens and women’s health markets, and plans to expand single-use silicone hydrogel manufacturing capacity and continue investing in CooperSurgical fertility through acquisitions. Management said cash, operating cash flow, and borrowing capacity should meet expected operating and investment needs, while noting additional debt financing could be sought depending on the size and timing of activities.
Management cited global economic uncertainty, foreign-currency and commodity volatility, healthcare-sector consolidation, and currency and interest-rate movements as risks. Other disclosed risks include acquisition execution and integration, debt and financing, manufacturing or supply disruption, regulation, product acceptance and reimbursement, recalls, litigation, taxes, and impairment of goodwill or other assets.
Second-quarter results included acquisition, restructuring, integration, manufacturing start-up, and legal costs, as well as $14.3 million of intangible amortization and a $0.4 million debt-extinguishment loss. First-half results included $30.5 million of amortization and $0.9 million of losses related to debt extinguishment and foreign-exchange contracts. The Sauflon integration plan has an estimated total restructuring cost of $125 million; manufacturing-related costs were expected to continue through fiscal 2016. More than 50 consolidated putative class actions allege contact-lens price-fixing related to unilateral pricing policies. CooperVision denies the allegations; the cases were in discovery, and the company could not assess the likelihood or estimate any potential loss.
Important facts for investors to verify
- Whether contact-lens growth and silicone hydrogel product mix can sustain margins, particularly given first-half gross-margin pressure and foreign-exchange effects.
- Acquisition performance, integration costs, and the contribution and margins of the expanding fertility business; confirm final purchase-price allocations as they become available.
- Debt levels, interest costs, covenant headroom, and available revolver capacity after subsequent acquisitions and planned investment.
- Progress and remaining costs under the Sauflon restructuring plan, and whether expected manufacturing-capacity investments convert into sales and cash flow.
- Developments in the UPP class actions and any change in the company’s ability to estimate potential exposure.
- The persistence of the unusually low 5.4% first-half effective tax rate and any effect of foreign-exchange movements on reported results.