The Cooper Companies, Inc. — Q1 FY2020 10-Q
Reporting period: Three months ended January 31, 2020. Financial statements are unaudited. Cooper operates through CooperVision (contact lenses) and CooperSurgical (women’s health, fertility, diagnostics and contraception).
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $646.2 million | $628.1 million | +3% |
| Gross profit / margin | $426.5 million / 66% | $418.5 million / 67% | +2% gross profit |
| Operating income / margin | $111.1 million / 17% | $110.9 million / 18% | Approximately flat |
| Net income | $90.5 million | $103.2 million | −12% |
| Diluted EPS | $1.82 | $2.07 | −12% |
| Operating cash flow | $129.7 million | $101.8 million | +$27.9 million |
| Capital expenditures | $69.0 million | $79.2 million | −$10.2 million |
| Free cash flow | $60.7 million | $22.6 million | +169% |
Sales rose in both segments: CooperVision was $485.2 million (+3%) and CooperSurgical was $161.0 million (+2%). CooperVision operating income increased to $122.9 million from $116.3 million; CooperSurgical operating income declined to $1.7 million from $7.2 million. The company attributed CooperSurgical’s profit pressure to higher selling and R&D expenses and manufacturing/integration costs.
Liquidity and debt
- At January 31, 2020, cash and cash equivalents were $76.8 million; working capital was $81.4 million, compared with $52.8 million at October 31, 2019.
- Total debt was $1.777 billion, down from $1.826 billion at fiscal year-end. The company had $763.8 million available under its $1.0 billion revolving facility.
- A $500 million term loan matures September 25, 2020; the $1.0 billion 2017 term loan matures November 1, 2022. The revolver matures March 1, 2021. The company reported compliance with debt covenants: leverage ratio 1.82:1 versus a 3.75:1 maximum, and interest coverage 15.26:1 versus a 3.00:1 minimum.
- Management said cash, cash equivalents and future operating cash flow should cover anticipated needs for at least 12 months from issuance of the financial statements, while noting additional financing may not be available on favorable terms, or at all.
Material changes, outlook and risks
- Net income and EPS fell primarily because the prior-year quarter included tax benefits from tax-audit settlements and revisions to provisional Tax Act charges. The effective tax rate was a 7.1% expense in Q1 FY2020 versus a 10.0% benefit in Q1 FY2019. Q1 FY2020 included $3.8 million of discrete tax benefits.
- CooperVision sales grew on lens volume and silicone hydrogel products; silicone hydrogel sales increased 7% and represented 73% of its sales. Foreign exchange reduced consolidated sales by approximately $2.8 million in Q1 FY2020. Consolidated constant-currency growth was 4%.
- Consolidated gross margin was down one percentage point. CooperVision cited $5.7 million of primarily earthquake-related Puerto Rico facility and other manufacturing costs; CooperSurgical cited $5.4 million of primarily integration and manufacturing costs.
- The company expressed optimism about the long-term prospects of its markets but gave no specific financial guidance in the provided filing text. It warned that COVID-19 was expected to negatively affect near-term results through deferred or lost sales and supply-chain and operating disruption; longer-term effects were uncertain.
- Other stated risks include international and foreign-exchange exposure, Brexit-related regulatory and trade uncertainty, tariffs, variable-rate debt and the transition away from LIBOR, cybersecurity, product and regulatory matters, and acquisition integration. A 364-day $500 million term loan matures in September 2020, creating a refinancing consideration.
- Unrecognized tax benefits were $54.8 million; $14.8 million could potentially be settled within 12 months. The company was under U.S. and U.K. tax audits. It said ordinary-course litigation was not expected to have a material adverse effect. A contact-lens pricing class action settlement received final court approval in March 2020, after the quarter end; the company had previously paid $3.0 million into escrow.
- Adoption of lease accounting on November 1, 2019 recognized $264.0 million of operating lease right-of-use assets and $272.7 million of lease liabilities at quarter-end, with no effect on income or cash flows.
Important facts for investors to verify
- How COVID-19 affected subsequent sales, manufacturing, suppliers and customers, and whether the near-term impact was more than anticipated.
- How CooperSurgical’s lower operating income and reported integration/manufacturing costs develop in subsequent quarters.
- Refinancing or repayment plans for the $500 million term loan due September 2020, and future borrowing costs and covenant headroom.
- Cash conversion and working-capital trends, including inventory of $526.5 million and 7.2 months on hand, versus 6.4 months at fiscal year-end.
- Developments in tax audits and reserves, Brexit-related requirements, and the final settlement of the contact-lens litigation.