The Cooper Companies, Inc. — Q3 2012 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2012. Unaudited results. Cooper operates CooperVision, a contact lens business, and CooperSurgical, a women’s health medical-device business.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $378.2 million | $351.4 million | $1,048.8 million | $969.9 million |
| Gross profit / margin | $240.1 million / 63% | $202.8 million / 58% | $671.2 million / 64% | $581.2 million / 60% |
| Operating income / margin | $77.3 million / 20% | $52.0 million / 15% | $204.4 million / 19% | $160.9 million / 17% |
| Net income | $66.9 million | $44.2 million | $176.4 million | $118.8 million |
| Diluted EPS | $1.36 | $0.90 | $3.60 | $2.46 |
CooperVision sales were $314.2 million in Q3, up 5%, and $871.2 million for nine months, up 7%. CooperSurgical sales were $64.0 million in Q3, up 20%, and $177.7 million for nine months, up 16%; excluding acquisitions, growth was 6% and 8%, respectively. Q3 growth was led by multifocal lenses (+26%), silicone hydrogel products (+28%), and surgical procedure products (+16%).
Cash flow: Operating cash flow was $200.3 million for nine months, versus $225.3 million in 2011. Investing used $205.5 million, including $145.0 million for acquisitions and $67.1 million in capital expenditures. Financing provided $13.8 million. Management reported Q3 operating cash flow of $78.1 million, versus $87.5 million.
Liquidity and debt: At July 31, cash was $12.7 million, working capital $396.0 million, and total debt $480.1 million, compared with $5.2 million, $273.1 million, and $380.4 million at October 31, 2011. The amended revolving credit facility totals $1.0 billion, with $545.9 million available and maturity extended to May 31, 2017. The company reported compliance with covenants: interest coverage 35.75x versus a 3.00x minimum, and leverage 1.12x versus a 3.75x maximum.
Other metrics: Nine-month effective tax rate was 8.5%, unchanged from the prior-year period. The company repurchased $71.1 million of shares during the nine months; about $78.9 million remained authorized at July 31. Goodwill impairment testing found no impairment.
Material changes and unusual items
- Revenue increased 8% for both Q3 and the nine-month period. Gross margin rose notably, reflecting manufacturing efficiencies and a more favorable mix, particularly higher-margin silicone hydrogel lenses; prior-year CooperVision margins also included $14.2 million of recall-related inventory and return reserves.
- Operating income increased 49% in Q3 and 27% for nine months. Lower interest expense also supported earnings. Prior-year nine-month results included a $16.5 million loss on extinguishing debt; 2012 included a $1.4 million charge related to the credit-agreement amendment.
- Cooper acquired approximately 97% of Danish IVF-device company Origio in July for $147.4 million cash consideration ($143.6 million net of acquired cash). The preliminary allocation included $107.7 million of amortizable intangible assets and $91.3 million of goodwill. Acquisition costs of $4.0 million were expensed. The company acquired additional shares for about $1.6 million on August 13 and was pursuing the remaining shares.
- Inventory increased $48.1 million from October 2011, attributed to production for new launches and the Avaira Toric relaunch, as well as Origio. Operating cash flow declined year over year, primarily reflecting working-capital changes, including inventory growth.
Outlook, risks, and contingencies
Management expressed optimism about long-term contact lens and women’s healthcare markets but gave no specific numerical earnings or revenue guidance in the supplied filing text. It cited global economic and European debt uncertainty and currency volatility as risks. Planned growth drivers include new silicone hydrogel, multifocal and single-use lenses, product launches, market expansion, and acquisitions. Avaira Toric received FDA clearance in April 2012 and was relaunched in May; Avaira Toric and Sphere lots subject to the recalls represented less than 2% of fiscal 2011 sales.
Other identified risks include acquisition integration and purchase-price adjustments, manufacturing or raw-material disruptions, competition and product acceptance, regulation and reimbursement, foreign exchange and variable interest rates, goodwill impairment, and product-related litigation. Securities and derivative lawsuits relating in part to the Avaira recalls remained pending; Cooper stated it could not assess whether a loss was probable or estimate a potential loss range. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Origio’s final purchase-price allocation, integration costs, and contribution to subsequent-period results.
- Whether sales and margins remain resilient amid foreign-exchange pressure, competition, and the Avaira product recall aftermath.
- Working-capital and inventory trends, and the effect on operating cash flow and liquidity.
- Debt levels, borrowing availability, covenant compliance, and exposure to variable rates and currency movements.
- Developments in the securities and derivative litigation, including any eventual financial exposure.