The Cooper Companies, Inc. — Q3 2010 Form 10-Q
Business and period: Global medical-products company operating CooperVision (contact lenses) and CooperSurgical (women’s healthcare devices and products). The quarter and nine-month periods ended July 31, 2010; comparisons are with the same 2009 periods. Amounts below are in millions unless otherwise stated.
Financial performance
- Third quarter: Revenue was $295.6, up 4%; gross profit was $176.0, up 20%, with a 60% gross margin versus 51%; operating income was $51.4, up 51%, with a 17% operating margin versus 12%. Net income rose to $39.7 from $21.9; diluted EPS was $0.86 versus $0.48.
- Nine months: Revenue was $845.2, up 6%; gross profit was $489.2, up 12%, with a 58% gross margin versus 55%; operating income was $127.4, up 18%. Net income declined to $64.6 from $70.4 and diluted EPS to $1.40 from $1.55, including a $27.0 litigation-settlement charge in 2010.
- Segments: Q3 CooperVision revenue increased 3% to $249.0 and CooperSurgical increased 5% to $46.6. Nine-month revenue increased 6% to $707.3 and 9% to $137.9, respectively. CooperVision growth included strong silicone-hydrogel and single-use lens sales; multifocal lenses declined. CooperSurgical’s nine-month organic growth was 5%.
- Cash flow: Nine-month operating cash flow was $203.1, up from $144.7; Q3 operating cash flow was $75.3 versus $75.9. Investing cash outflow was $73.4, including $41.0 of capital spending and $32.4 for acquisitions. Financing cash outflow was $130.3, primarily reflecting debt repayments.
- Margins and costs: Management attributed CooperVision margin improvement mainly to manufacturing efficiencies and a richer silicone-hydrogel mix. CooperSurgical’s Q3 gross margin also benefited from a one-time $1.5 vendor-dispute settlement. Nine-month restructuring costs associated with CooperVision’s manufacturing plan were $12.6, mostly reported in cost of sales.
- Balance sheet and liquidity at July 31: Cash was $3.2; working capital was $267.1, down from $328.5 at October 31, 2009. Total debt was $646.7, down from $781.5; debt-to-equity was 0.41:1 versus 0.51:1. Stockholders’ equity was $1,594.1. The $27.0 litigation settlement was recorded as a current liability.
- Debt and interest: Long-term debt included $285.0 outstanding on the revolver and $339.0 of 7.125% senior notes due 2015. The $650.0 revolver matures January 31, 2012. Interest expense declined 21% in Q3 and 14% year to date. The company hedges part of its variable-rate exposure.
Changes, outlook and risks
- Q3 earnings improved substantially year over year alongside higher revenue, lower cost of sales as a share of revenue, improved manufacturing efficiency, and reduced interest expense. For the nine-month comparison, the settlement charge and lower other income— including foreign-exchange gains recorded in 2009—contributed to lower net income and EPS despite higher operating income.
- The nine-month effective tax rate was 8.4%, versus 14.9% in 2009; management cited geographic income mix and the U.S. litigation charge. The filing reports no goodwill impairment in the annual fiscal-third-quarter test.
- Management expressed optimism about long-term contact-lens and women’s-healthcare markets but gave no quantified earnings or revenue guidance. It expects manufacturing restructuring activity in Norfolk to continue through fiscal Q1 2011 and believes cash, operating cash flow and credit facilities will fund operations, capital spending, dividends, settlement obligations and acquisitions. It may seek to renegotiate the revolver.
- Key business risks include economic and credit-market uncertainty; competition and product acceptance; CooperVision’s later entry into silicone hydrogel, limited multifocal capacity and lack of a silicone-hydrogel single-use product; restructuring execution and supply disruption; acquisitions and integration; regulatory approvals and reimbursement; foreign-exchange and interest-rate movements; and potential goodwill impairment.
- The proposed $27.0 securities-class-action settlement received preliminary court approval on August 16, 2010, with final approval scheduled for December 13, 2010. The company reported exhausted insurance coverage for defense costs; if settlement approval fails, litigation and legal costs could continue. Related derivative actions remain pending and do not seek damages from the company.
Investor verification points
- Confirm final court approval and payment or escrow status of the $27.0 securities-litigation settlement.
- Track CooperVision restructuring charges, completion timing and whether expected manufacturing savings are realized.
- Monitor silicone-hydrogel product launches, manufacturing capacity, competitive share and product-level growth, especially multifocal and single-use lenses.
- Assess the sustainability of margin gains, including the effects of restructuring costs and the one-time CooperSurgical vendor settlement.
- Review liquidity and refinancing plans ahead of the revolver’s January 2012 maturity, given low reported cash and remaining debt.
- Monitor receivables collection: days sales outstanding increased to 57 from 53 a year earlier; inventory months on hand improved to 5.9 from 6.0.