The Cooper Companies, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended July 31, 2021; unaudited. Comparisons are with the same periods of FY2020 unless otherwise noted. The company operates CooperVision (contact lenses) and CooperSurgical (women’s health and fertility).
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $763.4 million | $578.2 million | $2,163.4 million | $1,749.3 million |
| Gross profit / margin | $516.1 million / 68% | $360.8 million / 62% | $1,453.9 million / 67% | $1,110.8 million / 63% |
| Operating income / margin | $100.6 million / 13% | $72.0 million / 12% | $377.3 million / 17% | $211.7 million / 12% |
| Net income | $615.8 million | $55.2 million | $2,834.4 million | $157.2 million |
| Diluted EPS | $12.37 | $1.12 | $57.01 | $3.17 |
| Operating cash flow | $223.8 million | $112.8 million | $564.1 million | $268.3 million |
| Free cash flow (non-GAAP) | $180.2 million | $67.7 million | $414.7 million | $64.9 million |
Sales increased 32% in the quarter and 24% year to date. Gross-margin improvement was attributed primarily to favorable product mix. Q3 CooperVision sales rose 24% to $557.5 million; CooperSurgical sales rose 60% to $205.9 million. Year-to-date segment sales increased 19% and 40%, respectively. Growth reflected stronger lens volumes and reopening of healthcare facilities; foreign exchange also contributed positively.
Profit and tax caveat: Reported net income and EPS were exceptionally elevated by tax benefits, not solely by operating performance. The Q3 income-tax benefit was $521.8 million, including a $534.9 million benefit from remeasurement of UK deferred tax assets following enactment of a 25% corporate tax rate effective in FY2023. For the nine months, the income-tax benefit was $2,464.5 million; this included a $1,987.9 million deferred tax asset recognized after an intra-group intellectual-property transfer to a UK subsidiary. The filing reports no corresponding consolidated pretax income from the internal transfer.
Cash, liquidity and debt
- At July 31, cash and cash equivalents were $112.2 million; working capital was $411.4 million, versus $269.8 million at October 31, 2020.
- Total debt was $1,620.0 million, down from $1,793.2 million at October 31, 2020. Debt-to-equity was 0.24:1 versus 0.47:1; debt was 19% of total capitalization versus 32%.
- The company had $958.6 million available under its revolving credit facility. A separate $350 million term loan was outstanding and due October 15, 2021; the $850 million term loan and revolving facility mature April 1, 2025.
- Year-to-date capital expenditures were $149.4 million and acquisition spending was $234.9 million. Cash declined $3.8 million over the nine-month period to $113.0 million including restricted cash and cash held for sale.
- The company reported compliance with debt covenants at July 31: leverage ratio 1.52:1 against a maximum 3.75:1, and interest coverage 39.88:1 against a minimum 3.00:1. Management expected to meet debt service and liquidity needs for at least 12 months after issuance of the statements.
Material changes and notable items
- Q3 CooperVision operating income declined to $88.0 million from $93.7 million despite higher sales, primarily because of a $56.8 million charge for increased fair value of acquisition-related contingent consideration. CooperSurgical returned to quarterly operating profit of $26.2 million from a $9.3 million loss.
- SG&A rose 51% in the quarter, partly reflecting the contingent-consideration charge, distribution and marketing costs, and higher selling expenses. Nine-month operating income rose 78%, supported by sales growth.
- The company completed several acquisitions in FY2021; total closing purchase price for acquisitions during the nine months was $249.6 million. Purchase-price allocations remained preliminary for certain deals. The contingent-consideration liability reached $88.1 million at July 31.
- A CooperVision subsidiary acquired in January was classified as held for sale after an agreement to sell 50% and form a joint venture, subject to closing conditions including regulatory approvals. Assets held for sale were $88.1 million and liabilities were $1.6 million; no impairment was recorded.
- Inventory was $587.9 million, up $17.5 million from October 2020; inventory months on hand increased to 7.1 from 6.6. Receivables rose $99.7 million, primarily due to higher sales and collection timing.
Outlook, risks and contingencies
Management remained optimistic about the long-term prospects of the contact-lens and general healthcare markets, but provided no specific numerical sales, earnings or cash-flow guidance. It warned that COVID-19, variants, restrictions on healthcare access and economic disruption could continue to pressure sales, cash flow and performance. The company reported no significant manufacturing, supply or distribution disruption to date, but cited higher production costs, labor inefficiencies, unabsorbed overhead and freight costs.
Other disclosed risks include acquisition integration and contingent-payment uncertainty; foreign-exchange and interest-rate volatility; LIBOR transition (the company could not yet reasonably estimate the impact); UK-EU regulatory, trade and supply-chain uncertainty; changing tax rules; raw-material supply; healthcare regulation, product liability and intellectual-property litigation; and cybersecurity or operational disruptions. Interest-rate swaps had $1.1 billion notional value; management estimated a 1% rate change would change quarterly interest expense by approximately $1.5 million after swaps. The company stated that ordinary-course legal matters were not expected to have a material adverse effect.
Investor verification points
- Assess the recurring earnings picture separately from the substantial UK-related deferred-tax benefits and the $56.8 million contingent-consideration expense.
- Review the assumptions and recoverability behind the $2.55 billion deferred tax asset, including the effects of UK tax-rate changes and the intra-group IP transfer.
- Confirm repayment or refinancing of the $350 million term loan due October 15, 2021; the filing’s liquidity and covenant statements are management expectations as of issuance.
- Monitor contingent consideration, including revenue and regulatory milestones, and whether preliminary acquisition valuations change.
- Track regulatory approval and closing of the proposed 50% subsidiary sale/joint venture, as well as ongoing COVID-19 effects on customer access, demand and costs.