Business context and reporting period
The Cooper Companies, Inc. (Cooper) filed this unaudited Form 10-Q for the third quarter and first nine months of fiscal 2019, ended July 31, 2019. Its two operating segments are CooperVision, which sells contact lenses, and CooperSurgical, which serves women’s health, fertility and related markets. Financial amounts below are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $679.4 | $660.0 | $1,961.8 | $1,881.3 |
| Gross profit | $450.7 | $426.8 | $1,301.8 | $1,202.2 |
| Operating income | $142.2 | $115.6 | $400.1 | $280.4 |
| Net income | $120.1 | $100.8 | $345.7 | $39.2 |
| Diluted EPS | $2.40 | $2.03 | $6.91 | $0.79 |
| Operating cash flow | $196.7 | $235.3 | $513.3 | $432.3 |
- Q3 sales rose 3%, gross profit 6%, operating income 23%, net income 19% and diluted EPS 18% year over year. Gross margin was approximately 66% versus 65%; operating margin was approximately 21% versus 18%.
- For nine months, sales increased 4%, gross profit 8% and operating income 43%. Net income and EPS comparisons are strongly affected by a $196.7 million provisional tax charge related to U.S. tax reform recorded in the prior-year period.
- CooperVision sales were $509.1 in Q3, up 4%; CooperSurgical sales were $170.3, essentially flat. Nine-month sales increased 4% at each segment. CooperVision growth reflected lens volume and silicone hydrogel products; foreign exchange reduced sales by approximately $11.0 in Q3 and $46.6 for the nine months. CooperSurgical’s Q3 fertility sales declined, partly reflecting the prior exit from carrier screening and NIPT products.
- Q3 operating cash flow declined from the prior-year quarter; nine-month operating cash flow increased. Nine-month capital expenditures were $207.3, up from $150.2. Investing cash outflow was $266.4, versus $1,471.0, reflecting substantially lower acquisition spending after the prior-year PARAGARD purchase.
- At July 31, cash and cash equivalents were $112.7; total debt was $1,812.6, down from $2,022.8 at October 31, 2018. Working capital was $261.4 versus $554.4, mainly because $325.0 of the 364-day term loan was classified as short-term debt. The company reported $998.8 of available revolving credit capacity.
- Debt covenants were met: total leverage ratio was 1.83:1 against a maximum of 3.75:1, and interest coverage was 12.24:1 against a minimum of 3.00:1. The $325.0 outstanding under the 2018 term loan matures October 31, 2019; the $1,425.0 2017 term loan matures in November 2022.
Material changes and unusual items
- CooperSurgical’s nine-month operating results benefited from a $19.0 gain on selling U.S. Filshie Clip distribution rights for $21.0. The distribution agreement had been terminated early; CooperSurgical reported lower Filshie Clip revenue.
- Prior-year results included a $24.4 intangible impairment related to the exit from carrier screening and NIPT, as well as PARAGARD and LifeGlobal inventory step-up charges of $49.3 for the nine-month period. These items, the Filshie gain and the prior-year tax charge affect comparisons.
- CooperSurgical gross margin rose materially year over year, partly reflecting the absence of prior-year acquisition inventory step-up charges and higher-margin product mix. CooperVision margin was pressured by foreign exchange and product mix, partly offset by higher-margin product sales.
- Cooper acquired Incisive Surgical and Blanchard Contact Lenses during the nine-month period; purchase price allocations remained preliminary. The acquisitions were not material to reported consolidated results, according to the filing.
Outlook, risks and contingencies
- Management expressed optimism about the long-term prospects of global contact lens and general health care markets, but provided no specific numerical guidance in the supplied filing text. It highlighted continued focus on silicone hydrogel and single-use lenses, market expansion, and investment in CooperSurgical’s women’s health, fertility, diagnostics and contraception businesses.
- Management said cash, expected operating cash flow and available borrowing capacity should cover anticipated needs for at least 12 months. Additional financing may be needed for acquisitions, repurchases or other strategic activity and may not be available on favorable terms.
- Risks identified include foreign currency and interest-rate movements, trade barriers and tariffs, Brexit-related uncertainty, tax changes, debt and refinancing, acquisition integration, supply-chain or manufacturing disruption, regulation, product acceptance and recalls, litigation, and competition. A 100-basis-point interest-rate change was estimated to affect quarterly interest expense by approximately $4.8, based on Q3 average debt.
- A contact-lens pricing class-action settlement remains subject to final court approval; CooperVision paid $3.0 into escrow. The company stated it did not believe other ordinary-course legal matters would materially adversely affect its financial condition or results.
- Cooper adopted a soft freeze of its U.S. defined-benefit pension plan effective August 1, 2019, closing it to specified new hires; existing covered employees continue accruing benefits. Management reported no material impact on the period’s results, financial position or cash flows.
Important facts for investors to verify
- How the $325.0 million term loan maturing October 31, 2019 was refinanced or repaid, and the resulting interest cost and liquidity.
- Underlying earnings growth excluding the prior-year tax charge, prior-year impairment and inventory step-up charges, and the current-year Filshie gain.
- Whether CooperVision’s sales growth and margins can withstand foreign-exchange pressure and ongoing manufacturing and integration costs.
- CooperSurgical fertility trends, Filshie Clip revenue effects and performance of recently acquired businesses.
- Final court approval and any further obligations related to the contact-lens pricing settlement.