The Cooper Companies, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Fiscal quarter ended July 31, 2016; comparisons are with the quarter ended July 31, 2015. Nine-month figures cover the first nine months of fiscal 2016 and 2015. Cooper operates CooperVision, which sells contact lenses, and CooperSurgical, which serves women’s health, fertility and diagnostics markets. Figures below are in millions of dollars unless otherwise noted.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $514.7 | $461.7 | $1,448.2 | $1,341.5 |
| Gross profit | $316.6 | $272.9 | $877.1 | $817.0 |
| Operating income | $102.7 | $50.3 | $249.9 | $194.4 |
| Net income attributable to Cooper stockholders | $87.9 | $45.0 | $213.4 | $166.8 |
| Diluted EPS | $1.79 | $0.91 | $4.36 | $3.39 |
| Cash from operations | $128.9 | $96.0 | $316.3 | $286.4 |
- Q3 gross margin was approximately 61.5%, versus 59.1%; operating margin was approximately 19.9%, versus 10.9%. For the nine months, gross margin was approximately 60.6% versus 60.9%, and operating margin approximately 17.3% versus 14.5%.
- Q3 interest expense was $8.0 million versus $4.7 million; nine-month interest expense was $20.9 million versus $13.3 million. Nine-month effective tax rate was 5.4%, compared with 6.1%; management cited a prior-year tax-reserve release, a UK tax-rate reduction and the retroactive R&D credit extension.
- At July 31, cash was $62.6 million, total debt $1,444.1 million, working capital $609.4 million, and stockholders’ equity $2,737.4 million. Current assets were $929.6 million and current liabilities $320.2 million. The company reported $999.8 million available under its revolving facility.
- Nine-month capital expenditures were $117.4 million, compared with $184.7 million. Investing cash outflow was $368.7 million, including $251.3 million primarily for acquisitions. Financing cash inflow was $101.5 million.
Material changes and business drivers
- Q3 sales increased 11%; nine-month sales increased 8%. CooperVision sales rose 6% in Q3 and 5% year to date. CooperSurgical sales rose 38% and 24%, respectively, with much of the increase reflecting acquired fertility products and services.
- CooperVision Q3 sales benefited from silicone hydrogel products, up 15% and representing 60% of its sales, and from growth in toric, sphere and multifocal lenses. Asia Pacific sales increased 25%; EMEA was flat, with currency weakness offsetting product gains.
- CooperSurgical fertility sales more than doubled in Q3 to $52.0 million, representing half of segment sales, primarily reflecting recent acquisitions. Segment operating income declined slightly in Q3 as acquired lower-margin products and higher acquisition-related costs weighed on results.
- Operating income growth reflected higher sales, improved Q3 gross margin, and lower legal, restructuring and integration expenses. Q3 2015 included $17.0 million for a litigation settlement with JJVC; current-period legal and related costs were substantially lower.
- Net income attributable to Cooper stockholders for the nine months increased to $213.4 million from $166.8 million. The period also included $46.1 million of intangible amortization, compared with $38.4 million in the prior year.
Outlook, risks and unusual items
- Management expressed optimism about long-term contact-lens and women’s-health markets, but warned that global economic uncertainty, currency and commodity volatility, and healthcare-industry consolidation could affect the remainder of FY2016. No specific full-year revenue or earnings guidance was provided in the supplied filing text.
- CooperVision plans continued investment in single-use manufacturing capacity to address expected demand for clariti 1day and MyDay products. CooperSurgical expects to continue investing in fertility through acquisitions and complementary products.
- Management expected approximately $14.8 million of amortization expense in Q4 FY2016. Sauflon restructuring and manufacturing costs were expected to continue through fiscal 2016; estimated total plan costs were $125 million.
- During the first nine months, the company acquired Research Instruments, The Pipette Company, Genesis Genetics, Kivex Biotec, Recombine and Reprogenetics UK. Purchase-price allocations were preliminary; management said the acquisitions’ pro forma operating effects were not material to consolidated results.
- Foreign-currency translation produced a $126.9 million comprehensive loss in Q3 and a $188.4 million loss for the first nine months, substantially reducing comprehensive income but not reported net income. The filing identifies foreign-exchange exposure as a risk.
- Debt refinancing in March 2016 established a $1.0 billion revolving facility and an $830 million term loan, with the facility maturing in 2021. At quarter end, the company reported covenant compliance: leverage ratio 2.25 to 1.00 versus a maximum 3.75, and interest coverage 24.03 to 1.00 versus a minimum 3.00. Variable interest rates and acquisition-related indebtedness remain risks.
- More than 50 putative class actions allege contact-lens pricing-policy antitrust violations. Certain claims survived a motion to dismiss and the cases were in discovery. The company denied the allegations and said loss was not considered probable or reasonably estimable.
- The UK referendum to leave the EU was added as a risk factor due to uncertainty about potential effects on global markets and the company’s European operations. The annual goodwill impairment assessment found no impairment.
Important facts for investors to verify
- How much CooperSurgical’s acquired fertility businesses contribute to ongoing sales, margins and cash generation as purchase accounting and integration progress.
- Whether CooperVision’s silicone hydrogel and single-use growth can continue to offset older-product declines, currency headwinds and manufacturing-capacity demands.
- Debt levels, refinancing and interest costs, covenant headroom, and the company’s ability to fund acquisitions and capital spending while maintaining liquidity.
- Developments in the UPP litigation, including any change in the company’s assessment of potential loss or exposure.
- The impact of foreign-exchange movements, including the substantial translation losses recorded in other comprehensive income, and any resulting effects on reported results or equity.
- Actual remaining Sauflon restructuring costs, acquisition integration outcomes, and whether management’s stated outlook and Q4 amortization estimate are achieved.