Cooper Companies, Inc. — Q3 2015 Form 10-Q
Reporting period: Fiscal quarter and nine months ended July 31, 2015. Cooper operates CooperVision, which sells contact lenses, and CooperSurgical, which provides women’s healthcare products and solutions. Figures are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $461.7m | $432.5m | $1,341.5m | $1,249.8m |
| Gross profit / margin | $272.9m / 59% | $280.6m / 65% | $817.0m / 61% | $812.0m / 65% |
| Operating income / margin | $50.3m / 11% | $96.6m / 22% | $194.4m / 14% | $267.1m / 21% |
| Net income attributable to Cooper stockholders | $45.0m | $88.1m | $166.8m | $239.1m |
| Diluted EPS | $0.91 | $1.80 | $3.39 | $4.89 |
| Operating cash flow | $96.0m | $107.9m | $286.4m | $302.8m |
Revenue and segments: Q3 sales rose 7%. CooperVision sales increased 10% to $385.5m, led by silicone hydrogel products; CooperSurgical sales declined 8% to $76.2m. For the nine months, CooperVision sales increased 11% to $1,114.4m and CooperSurgical fell 6% to $227.1m. Q3 silicone hydrogel products represented 56% of CooperVision sales, up from 50%.
Cash flow, investment and liquidity: Nine-month capital expenditures were $184.7m, primarily for manufacturing capacity, and cash used in investing activities was $185.9m. Financing activities used $104.2m; cash decreased by $8.2m to $17.0m. Working capital was $285.1m, down from $349.4m at October 31, 2014. The company reported $1,307.9m total debt, $930.0m available under its revolving credit agreement, and compliance with debt covenants. Debt-to-equity was 0.49:1.
Margins and earnings drivers: Q3 cost of sales rose 24%, faster than sales, and SG&A rose 19%. Management cited foreign-exchange pressure, product and equipment rationalization, new-facility start-up costs, acquisition integration and restructuring, higher amortization, and legal costs. Interest expense increased to $4.7m in Q3 and $13.3m year to date, primarily reflecting debt incurred for Sauflon. The nine-month effective tax rate was 6.1%, versus 8.1% a year earlier.
Material changes and unusual items
- Sales growth was accompanied by sharply lower operating income: down 48% in Q3 and 27% year to date; diluted EPS also declined in both periods.
- The Sauflon acquisition, completed in August 2014, contributed to CooperVision growth and higher debt, amortization and integration costs. The estimated total cost of its integration and restructuring plan increased by $42m to $104m; management expected operating-expense activities to conclude in fiscal Q1 2016 and manufacturing-related costs to continue through fiscal 2016.
- Q3 included a $17.0m payment to settle existing patent disputes with Johnson & Johnson Vision Care. The settlement included reciprocal patent cross-licenses and covenants; neither party admitted liability.
- More than 50 putative consumer class actions alleged antitrust violations related to contact-lens unilateral pricing policies. Cases were consolidated in federal court in Florida. CooperVision denied the allegations; the company said it could not assess the likelihood or estimate any potential loss.
- After quarter-end, CooperSurgical acquired Reprogenetics for $46.5m. Management expected the acquisition to be neutral to EPS, excluding acquisition costs and amortization, through fiscal 2016.
Outlook, commentary and risks
Management expressed optimism about the long-term contact-lens and women’s healthcare markets, but did not provide quantified fiscal 2015 sales or earnings guidance in the supplied filing text. Cooper planned continued investment in single-use lens manufacturing capacity and CooperSurgical acquisitions and product development. Management said cash, operating cash flow and borrowing capacity were expected to fund operations and anticipated needs, while noting additional debt financing might be sought depending on the scale and timing of business activities.
Risks highlighted include foreign-exchange and interest-rate movements; economic and European market uncertainty; Sauflon integration, synergy realization and leverage; manufacturing or supply disruptions; regulatory, product-liability and recall exposure; litigation; reimbursement and product-acceptance risks; and possible goodwill impairment. The company reported no goodwill impairment in its fiscal third-quarter assessment and no material changes to the risk factors in its prior annual report.
Important facts for investors to verify
- Whether CooperVision’s sales growth and single-use product mix can offset currency pressure, restructuring costs and weaker gross margins.
- Actual remaining Sauflon integration costs and progress toward the revised $104m estimate and stated completion timetable.
- Debt maturities, borrowing availability, interest costs and covenant headroom, particularly following the Sauflon acquisition.
- Developments and potential financial exposure from the consolidated pricing-policy class actions; the filing provides no loss estimate.
- Reprogenetics’ performance relative to management’s stated EPS-neutrality expectation and the impact of the acquisition on CooperSurgical.