The Cooper Companies, Inc. — Q3 FY2017 Form 10-Q
Business and period: Global medical-device company operating CooperVision, which develops and sells contact lenses, and CooperSurgical, focused on women’s health, fertility and diagnostics. The quarter ended July 31, 2017; comparisons are with the three and nine months ended July 31, 2016. Figures are in U.S. dollars.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $556.0 million, up 8% | $1,577.5 million, up 9% |
| Gross profit / margin | $356.2 million / 64%, versus 62% | $1,012.4 million / 64%, versus 61% |
| Operating income / margin | $112.8 million / 20%, versus $102.7 million / 20% | $320.6 million / 20%, versus $249.9 million / 17% |
| Net income attributable to Cooper stockholders | $103.6 million, versus $87.9 million | $284.3 million, versus $213.4 million |
| Diluted EPS | $2.09, versus $1.79 | $5.74, versus $4.36 |
| Cash from operating activities | $154.6 million, versus $128.9 million | $394.6 million, versus $316.3 million |
Revenue mix: Quarterly CooperVision sales were $437.3 million, up 7%; CooperSurgical sales were $118.7 million, up 13%. For the nine months, CooperVision sales rose 6% to $1,235.0 million and CooperSurgical rose 21% to $342.5 million. Growth in CooperVision reflected silicone hydrogel products and lens volume; CooperSurgical’s increase was primarily attributable to acquired fertility products and services.
Cash, liquidity and debt at July 31: Cash was $46.0 million, versus $100.8 million at October 31, 2016. Working capital was $560.9 million, compared with $393.9 million. Total debt was $1,213.4 million, down from $1,333.8 million; debt-to-equity was 0.39:1 versus 0.49:1. The company reported $645.7 million available under its revolving facility and $830.0 million outstanding under its term loan. It was in compliance with covenants: total leverage ratio 1.70 against a maximum 3.75, and interest coverage ratio 24.08 against a minimum 3.00.
Cash flows: Nine-month investing cash use was $292.4 million, including $95.4 million of capital expenditures and $197.0 million for acquisitions. Financing cash use was $160.9 million, including net debt repayments, $29.5 million of share repurchases and dividends. Cash declined by $54.8 million during the period.
Changes, outlook and notable items
- Quarterly gross margin improved, primarily reflecting a higher mix of CooperVision products and favorable currency effects. Prior-year CooperVision margins included Sauflon restructuring and facility-startup costs. Nine-month operating margin increased to 20% from 17%, with higher sales and improved gross margin contributing.
- CooperVision silicone hydrogel products represented 66% of its quarterly sales, versus 60% a year earlier. CooperSurgical fertility products and services represented 55% of quarterly sales, versus 50%, with acquisitions contributing to the shift.
- The nine-month effective tax rate was 4.4%, versus 5.4%. Management attributed the lower rate to geographic income mix and share-based compensation tax benefits. Adoption of ASU 2016-09 generated a $13.4 million discrete tax benefit in the first nine months; the filing also records a $17.9 million deferred-tax asset adjustment to opening retained earnings.
- Acquisitions included Wallace, acquired in November 2016 for approximately $167.4 million, and Grand Vista, acquired in June 2017 for approximately $23.7 million in cash. After quarter-end, in August 2017, the company acquired Procornea, a specialty contact-lens manufacturer; purchase-price details are not provided here.
- Management expressed optimism about long-term contact-lens and health-care markets but gave no specific numerical full-year guidance in this filing. It cited global-market uncertainty, currency volatility, Brexit-related uncertainty and health-care industry consolidation as risks. Management said existing cash, operating cash flow and borrowing capacity should fund operations, while noting that additional financing for acquisitions or other needs may not be available on favorable terms, or at all.
- CooperVision entered an August 2017 settlement agreement, without admitting liability, to resolve contact-lens pricing-policy class-action claims, subject to court approval. The company accrued $3.0 million in the quarter. The UK tax authorities were also reviewing the company’s potential exposure under the UK Diverted Profits Tax and related transfer pricing; the company said an adverse outcome could affect results.
- Other risks include foreign-exchange and variable-interest-rate exposure, acquisition integration and execution, product and regulatory matters, supply disruptions, and potential goodwill impairment. The third-quarter annual goodwill assessment identified no impairment. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.
Investor facts to verify
- Whether the contact-lens litigation settlement receives court approval and whether the recorded $3.0 million accrual is sufficient.
- How much sales and earnings growth reflects underlying product demand versus acquisitions, currency movements and the unusually low effective tax rate.
- Whether inventory months on hand, which rose to 6.8 from 5.6 at October 31, 2016, normalize as product launches and production levels evolve.
- Potential effects of the UK tax inquiry, tax examinations and changes in international tax rules.
- Debt levels, refinancing capacity, interest-rate exposure and covenant headroom as acquisition and capital-allocation plans continue.