The Cooper Companies, Inc. — Q3 FY2020 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended July 31, 2020, compared with the corresponding 2019 periods. CooperVision sells contact lenses; CooperSurgical focuses on women’s health, surgical products and fertility. Management attributes the period’s deterioration primarily to COVID-19-related disruption.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $578.2m | $679.4m | $1,749.3m | $1,961.8m |
| Gross profit / margin | $360.8m / 62% | $450.7m / 66% | $1,110.8m / 63% | $1,301.8m / 66% |
| Operating income / margin | $72.0m / 12% | $142.2m / 21% | $211.7m / 12% | $400.1m / 20% |
| Net income | $55.2m | $120.1m | $157.2m | $345.7m |
| Diluted EPS | $1.12 | $2.40 | $3.17 | $6.91 |
| Operating cash flow | $112.8m | $196.7m | $268.3m | $513.3m |
| Capital expenditures | $45.1m | $75.4m | $203.4m | $207.3m |
| Free cash flow* | $67.7m | Not stated here | $64.9m | Not stated here |
*Non-GAAP, defined as operating cash flow less capital expenditures. Nine-month free cash flow was down 79% year over year; Q3 was down 44%.
- Segments: Q3 CooperVision sales were $449.3m, down 12%; CooperSurgical sales were $128.9m, down 24%. Segment operating income was $93.7m and negative $9.3m, respectively, versus $134.2m and $20.6m a year earlier.
- Balance sheet and liquidity at July 31: Cash and equivalents were $127.4m; working capital was $192.6m, up from $52.8m at October 31, 2019. Total debt was $1,880.4m, versus $1,826.3m; stockholders’ equity was $3,760.4m. The company had $810.6m available on its revolving facility. Operating lease liabilities totaled $268.9m.
- Cash conversion: Nine-month operating cash flow declined by $245.0m, reflecting lower earnings and a $155.9m operating-capital cash outflow. Inventory rose $88.0m to $594.9m; inventory on hand increased to 8.2 months from 6.4, and DSO rose to 65 days from 56.
Changes, outlook and risks
- Q3 sales fell 15%, operating income fell 49%, and diluted EPS fell 53%. Nine-month sales declined 11%, operating income 47%, and diluted EPS 54%. Lower volumes were the main sales driver; average realized prices did not materially affect sales.
- COVID-19 restrictions, reduced patient visits and deferred elective procedures weakened demand. Lower factory utilization and other pandemic-related production costs pressured gross margins. The company also cited higher freight costs and labor inefficiencies, while lower advertising, distribution and travel spending partially offset the downturn.
- CooperSurgical’s Q3 fertility and office/surgical sales fell 26% and 23%, respectively. CooperVision’s sales declined across lens categories and geographies; growth in MyDay and MiSight partially offset declines in some categories.
- Management remained optimistic about long-term market prospects but warned that pandemic uncertainty could continue to pressure sales, cash flow and performance. No quantified revenue or earnings guidance was provided. Management expected available cash, operating cash flow and credit availability to meet anticipated needs for at least 12 months and expected covenant compliance and debt service during that period.
- Debt and rates: A new $1.29bn revolving facility and $850m term loan were entered into on April 1, 2020, both maturing April 1, 2025. The separate $500m term loan was due September 25, 2020. The company reported covenant compliance at a 2.23x total leverage ratio against a 3.75x maximum and a 17.60x interest coverage ratio against a 3.00x minimum. Six swaps hedged $1.5bn of variable-rate exposure; LIBOR transition impacts remained under evaluation.
- Other notable items: The effective tax rate was 16.9% for Q3 and 9.0% for the nine-month period, versus 5.4% and 0.9% in 2019; management cited lower pretax income, tax items and reduced share-based compensation tax benefits. No goodwill or intangible impairment was recorded after the annual assessment, though management cautioned future pandemic developments could affect estimates. Ordinary-course legal matters were not expected to have a material adverse effect. The company repurchased $47.8m of shares in the nine months; no repurchases occurred in Q3.
- Key risks include further pandemic-related demand or supply disruption, inventory obsolescence and customer credit risk; international, currency and interest-rate exposure; Brexit and regulatory changes; raw-material supply constraints; and cybersecurity incidents. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Investor verification priorities
- Confirm how the $500m term loan due September 25, 2020 was repaid, refinanced or otherwise addressed after quarter-end.
- Track post-quarter demand recovery, customer access and the effect of renewed COVID-19 disruption on sales and manufacturing utilization.
- Assess whether elevated inventory and DSO normalize, and whether operating cash flow and free cash flow recover.
- Review covenant headroom, variable-rate exposure, swap performance and LIBOR replacement terms.
- Monitor tax audits and unrecognized tax benefits, the continuing impairment assumptions, and any changes in legal or regulatory contingencies.