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S&P raises Cooper Cos rating to 'BBB-'
April 5, 2012 / 5:47 PM / 6 years ago

S&P raises Cooper Cos rating to 'BBB-'

April 5 - Overview	
     -- U.S.-based medical device company Cooper's financial profile has 	
meaningfully strengthened over the past few years as a result of debt paydown, 	
sales growth, and margin improvement	
     -- We are raising our rating on Cooper to 'BBB-' from 'BB+'	
     -- Our stable rating outlook reflects our expectation that the company 	
will maintain a "modest" financial risk profile with conservative financial 	
policies.	
	
Rating Action	
On April 5, 2012, Standard & Poor's Ratings Services raised its corporate 	
credit rating on Pleasanton, Calif.-based Cooper Cos. Inc. to 'BBB-' from 	
'BB+'. The rating outlook is stable.	
	
Rationale	
The upgrade reflects operational and financial strengthening over the past 	
year, which has led us to revise our view of Cooper's financial risk to 	
"modest" from "intermediate." We expect that management will maintain 	
financial parameters consistent with "modest" financial risk as per our 	
criteria. Debt protection metrics have already stabilized at the stronger end 	
of this range for the past four quarters. Adjusted debt to EBITDA and funds 	
from operations (FFO) to adjusted debt were 1.4x and 68%, respectively, for 	
the 12 months ended Jan. 30, 2012, and we expect little change in fiscal 2012.	
	
We believe that EBITDA and cash flow will continue to improve. Cooper should 	
be able to grow soft contact lens sales a few hundred basis points above the 	
industry growth rate (estimated at 4% to 5%) as it introduces new silicone 	
hydrogel (SiH) lens categories, such as Avaira toric, and expands in new 	
geographies, such as Japan. The EBITDA margin could be negatively affected in 	
fiscal 2012 by the Avaira recall; however, we generally expect the EBITDA 	
margin to strengthen by 50 to 100 basis points annually, reflecting 	
manufacturing improvements and trade-up of customers from hydrogel to 	
higher-margin SiH lenses. This margin improvement will be slightly offset as 	
the single wear lenses, which have lower margins but higher profit per 	
customer, grow relative to two-week and monthly modalities.	
	
We expect free operating cash flow to exceed $200 million in 2012, and 	
increase at a greater rate of growth than revenues thereafter, reflecting 	
margin improvement. We believe that Cooper will deploy the majority of cash 	
flow to acquisitions, and a lesser amount to fund share repurchases. Under our 	
base case, we believe the company could execute a debt-financed acquisition of 	
up to $600 million and maintain the 'BBB-' rating.	
	
Our view of Cooper's business risk profile as "fair" reflects a lack of 	
product diversity, given that CooperVision (CVI) represents 83% of total 	
sales, only partially offset by some diversity within the category. The 	
company manufactures and markets a variety of soft contact lenses, including 	
value-added specialty products such as toric lenses (to correct astigmatism), 	
multifocal, and more commodity-like spherical contact lenses. CVI has 	
distinguished itself as a leader in toric lenses, which represent 30% of 	
sales. Offering a variety of technologies, SiH lenses and Proclear lenses 	
reflect 26% and 32%, respectively, of soft contact lens sales. The company's 	
global footprint provides some diversity for the otherwise narrowly focused 	
business, with the Americas, Europe/Middle East, and Asia/Pacific representing 	
39%, 36%, and 25% of sales, respectively.	
	
Cooper's "fair" business profile also reflects competition from much larger 	
players in the $7 billion contact lens industry, such as the Vision Care 	
division of Johnson & Johnson (over 40% market share) and CIBA Vision (owned 	
by Novartis AG). With a market share of about 17%, CVI has overtaken Bausch & 	
Lomb for the No. 3 spot in global sales, and holds a No. 2 market share in the 	
U.S. Despite its lack of dominance in the industry, customer switching between 	
contact lens brands is typically low. Cooper recently announced that it will 	
introduce a daily SiH in the second half of 2012. Japan, which is the second 	
largest contact lens market (after the U.S.), is the fastest growing 	
single-use lens market. 	
	
CooperSurgical (CSI) produces women's health care products. Although it 	
contributes only 17% of total revenues, CSI has grown organically and through 	
a series of acquisitions over the past several years. Margins have steadily 	
strengthened and, given minimal capital expenditure needs, this business has 	
been a strong cash flow generator. Expanding its customer base, products for 	
surgical procedures now comprise 23% of sales. This served to modestly 	
insulate CSI from the recession, given that GYN office visits declined. Office 	
products comprise 31% of sales. We expect CSI to remain acquisitive and that 	
tuck-in acquisitions will be financed with internally generated cash.	
	
Liquidity	
We believe Cooper currently has "strong" liquidity to meet its needs over the 	
next two to three years. Our view of the company's liquidity profile 	
incorporates the following expectations:	
     -- We expect liquidity sources (consisting of discretionary cash flow and 	
revolver availability) to exceed uses by over 1.5x over the coming year. 	
     -- We expect liquidity sources to continue exceeding uses, even if EBITDA 	
declines by 30%. 	
     -- We believe Cooper can absorb a high-impact, low-probability event.	
     -- We believe Cooper will not breach its covenants in the event of a 30% 	
revenue decline, given its current covenant cushion in excess of 30%.	
     -- Given Cooper's January 2011 refinancing, the company appears to have 	
solid bank relationships, and the appreciation of its stock price over the 	
past two years indicates potentially favorable access to equity markets.	
	
Cooper typically maintains a negligible cash balance. Its $750 million 	
revolving credit facility (unrated), matures in January 2016; $604 million was 	
available at Jan. 31, 2012.	
	
Despite the capital intensity of its business, Cooper generated $305 million 	
of operating cash flow in fiscal 2011, relative to $95 million of capital 	
expenditures and $58 million of acquisitions during the fiscal year. The 	
company benefits from a low effective tax rate, which was 9% in fiscal 2011, 	
and it expects the rate to range between 10% and 12% in fiscal 2012. We expect 	
capital expenditures to be approximately $130 million annually over the next 	
several years, and assume about $150 million of aggregate acquisition spending 	
annually. CSI's acquisitions likely will be similar in scale to those made 	
over the past several years, and funded from internally generated cash.	
	
In December 2011, the company announced a share repurchase program of up to 	
$150 million, which will run through December 2012. In the first fiscal 	
quarter of 2012, Cooper purchased $46 million of common stock. We expect share 	
repurchase to be opportunistic, and made with excess funds when no attractive 	
acquisition opportunities are available.	
	
Outlook	
Our stable rating outlook reflects our expectations that the company will 	
maintain a "modest" financial risk profile. Although we expect tuck-in 	
acquisitions, largely at CSI, to be financed with internally generated cash, 	
the rating provides some cushion for incurrence of debt for a larger scale 	
opportunity, perhaps at CVI. An upgrade would likely be predicated on 	
increasing diversification. We do not anticipate that operational difficulties 	
would result in a downgrade. Rather, a downgrade would more likely be the 	
result of a material debt-financed acquisition, or increased capital spending 	
on manufacturing plant expansion that would cause debt to EBITDA to rise to 	
over 2.0x for a protracted period.	
	
Related Criteria And Research	
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
	
Ratings List	
	
Upgraded	
                            To                From	
Cooper Cos. Inc.	
 Corporate Credit Rating    BBB-/Stable/--    BB+/Positive/--	
 	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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