UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q
_____________________________________________________________
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended July 31, 2020
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the transition period from to
Commission File Number 1-8597
_____________________________________________________________
(Exact name of registrant as specified in its charter)
_____________________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (925 ) 460-3600
_____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
On August 28, 2020, 53,340,401 shares of Common Stock, $.10 par value, were outstanding.
INDEX
Page No. | ||
PART I. | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Periods Ended July 31,
(In millions, except for earnings per share)
(Unaudited)
Three Months | Nine Months | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||
Cost of sales | |||||||||||||||
Gross profit | |||||||||||||||
Selling, general and administrative expense | |||||||||||||||
Research and development expense | |||||||||||||||
Amortization of intangibles | |||||||||||||||
Gain on sale of an intangible | ( | ) | |||||||||||||
Operating income | |||||||||||||||
Interest expense | |||||||||||||||
Other (income) expense, net | ( | ) | ( | ) | ( | ) | |||||||||
Income before income taxes | |||||||||||||||
Provision for income taxes (Note 7) | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Earnings per share (Note 8): | |||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||
Diluted | $ | $ | $ | $ | |||||||||||
Number of shares used to compute earnings per share: | |||||||||||||||
Basic | |||||||||||||||
Diluted | |||||||||||||||
Other comprehensive income, net of tax: | |||||||||||||||
Cash flow hedges | $ | ( | ) | $ | ( | ) | |||||||||
Foreign currency translation adjustment | ( | ) | ( | ) | |||||||||||
Comprehensive income | $ | $ | $ | $ | |||||||||||
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
3
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In millions, unaudited)
July 31, 2020 | October 31, 2019 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Trade accounts receivable, net of allowance for doubtful accounts of $11.9 at July 31, 2020 and $16.4 at October 31, 2019 | |||||||
Inventories (Note 4) | |||||||
Prepaid expense and other current assets | |||||||
Total current assets | |||||||
Property, plant and equipment, at cost | |||||||
Less: accumulated depreciation and amortization | |||||||
Operating lease right-of-use assets (Note 2) | — | ||||||
Goodwill (Note 5) | |||||||
Other intangibles, net (Note 5) | |||||||
Deferred tax assets | |||||||
Other assets | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Short-term debt (Note 6) | $ | $ | |||||
Accounts payable | |||||||
Employee compensation and benefits | |||||||
Operating lease liabilities | — | ||||||
Other current liabilities | |||||||
Total current liabilities | |||||||
Long-term debt (Note 6) | |||||||
Deferred tax liabilities | |||||||
Long-term tax payable | |||||||
Operating lease liabilities | — | ||||||
Accrued pension liability and other | |||||||
Total liabilities | $ | $ | |||||
Contingencies (Note 13) | |||||||
Stockholders’ equity: | |||||||
Preferred stock, 10 cents par value, shares authorized: 1.0; zero shares issued or outstanding | |||||||
Common stock, 10 cents par value, shares authorized: 120.0; issued 53.4 at July 31, 2020 and 53.2 at October 31, 2019 | |||||||
Additional paid-in capital | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Retained earnings | |||||||
Treasury stock at cost: 4.3 shares at July 31, 2020 and 4.1 shares at October 31, 2019 | ( | ) | ( | ) | |||
Total Cooper stockholders’ equity | |||||||
Noncontrolling interests | |||||||
Stockholders’ equity (Note 10) | |||||||
Total liabilities and stockholders’ equity | $ | $ | |||||
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
4
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity (In millions, unaudited)
Common Shares | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Noncontrolling Interests | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
(In millions) | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance at November 1, 2018 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of common stock for stock plans, net | — | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Treasury stock repurchase | — | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||
Dividends on common stock ($0.03 per share) | — | — | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
ASU 2016-16 adoption | — | — | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||
Balance at January 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Issuance of common stock for stock plans, net | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance at April 30, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Issuance of common stock for stock plans, net | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Dividends on common stock ($0.03 per share) | — | — | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance at July 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
5
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity (In millions, unaudited)
Common Shares | Treasury Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Noncontrolling Interests | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
(In millions) | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance at November 1, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of common stock for stock plans, net | — | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Dividends on common stock ($0.03 per share) | — | — | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance at January 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Issuance of common stock for stock plans, net | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Treasury stock repurchase | ( | ) | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||
Issuance of common stock for employee stock purchase plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance at April 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of common stock for stock plans, net | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of common stock for employee stock purchase plan | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Dividends on common stock ($0.03 per share) | — | — | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance at July 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
6
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Nine Months Ended July 31,
(In millions, unaudited)
2020 | 2019 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | $ | |||||
Depreciation and amortization | |||||||
Gain on sale of an intangible | ( | ) | |||||
Increase in operating capital | ( | ) | ( | ) | |||
Other non-cash items | ( | ) | |||||
Net cash provided by operating activities | |||||||
Cash flows from investing activities: | |||||||
Purchases of property, plant and equipment | ( | ) | ( | ) | |||
Acquisitions of businesses and assets, net of cash acquired, and other | ( | ) | ( | ) | |||
Net cash used in investing activities | ( | ) | ( | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from long-term debt | |||||||
Repayments of long-term debt | ( | ) | ( | ) | |||
Net (repayments) proceeds from short-term debt | ( | ) | |||||
Net (payments) proceeds related to share-based compensation awards | ( | ) | |||||
Dividends on common stock | ( | ) | ( | ) | |||
Repurchase of common stock | ( | ) | ( | ) | |||
Issuance of common stock for employee stock purchase plan | |||||||
Debt issuance costs | ( | ) | ( | ) | |||
Net cash used in financing activities | ( | ) | ( | ) | |||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ) | |||||
Net increase in cash, cash equivalents and restricted cash | |||||||
Cash, cash equivalents and restricted cash at beginning of period | |||||||
Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||
Reconciliation of cash flow information: | |||||||
Cash and cash equivalents | $ | $ | |||||
Restricted cash included in other current assets | |||||||
Total cash, cash equivalents and restricted cash | $ | $ | |||||
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
7
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1. General
The accompanying Consolidated Condensed Financial Statements of the Cooper Companies, Inc. and its subsidiaries (the Company) have been prepared in accordance with U.S. GAAP for interim financial information and with the requirements of Regulation S-X, Rule 10-01 for financial statements required to be filed as a part of this Quarterly Report on Form 10-Q. Unless the context requires otherwise, terms "the Company", "we", "us", and "our" are used to refer collectively to the Cooper Companies, Inc. and its subsidiaries.
The accompanying Consolidated Condensed Financial Statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Cooper Companies, Inc. and its subsidiaries (the Company) and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2019. The Consolidated Condensed Financial Statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. Readers should not assume that the results reported here either indicate or guarantee future performance.
Accounting Policies
There have been no material changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, except as it relates to the adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), which is described below.
Leases
We consider an arrangement a lease if the arrangement transfers the right to control the use of an identified asset in exchange for consideration. We have operating leases, but do not have material financing leases. Lease right-of-use assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make payments arising from the lease agreement. These assets and liabilities are recognized at the commencement of the lease based upon the present value of the future minimum lease payments over the lease term.
The lease term reflects the noncancelable period of the lease together with periods covered by an option to extend or terminate the lease when management is reasonably certain that it will exercise such option. Changes in the lease term assumption could impact the right-of-use assets and lease liabilities recognized on the balance sheet. As our leases typically do not contain a readily determinable implicit rate, we determine the present value of the lease liability using our incremental borrowing rate at the lease commencement date based on the lease term on a collateralized basis.
Estimates
The World Health Organization categorized the Coronavirus disease 2019 (COVID-19) as a pandemic. The COVID-19 pandemic has caused a severe global health crisis, along with economic and societal disruptions and uncertainties, which have negatively impacted business and healthcare activity globally. As a result of healthcare systems responding to the demands of managing the pandemic, governments around the world imposing measures designed to reduce the transmission of the COVID-19 virus, and individuals responding to the concerns of contracting the COVID-19 virus, many optical practitioners & retailers, hospitals, medical offices and fertility clinics closed their facilities, restricted access, or delayed or canceled patient visits, exams and elective medical procedures, and many customers that have reopened are experiencing reduced patient visits. This has had, and we believe will continue to have, an adverse effect on our sales, operating results and cash flows.
The preparation of Consolidated Condensed Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates particularly as it relates to estimates reliant on forecasts and other assumptions reasonably available to the Company and the uncertain future impacts of the COVID-19 pandemic and related economic disruptions. The extent to which the COVID-19 pandemic and related economic disruptions impact our business and financial results will depend on future developments including, but not limited to, the continued spread, duration and severity of the COVID-19 pandemic; the occurrence, spread, duration and severity of any subsequent wave or waves of outbreaks; the actions taken by the U.S. and foreign governments to contain the COVID-19 pandemic, address its impact or respond to the reduction in global and local economic activity;
8
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
the occurrence, duration and severity of a global, regional or national recession, depression or other sustained adverse market event; the impact of the developments described above on our customers and suppliers; and how quickly and to what extent normal economic and operating conditions can resume. The accounting matters assessed included, but were not limited to:
• | allowance for doubtful accounts and credit losses |
• | carrying value of inventory |
• | the carrying value of goodwill and other long-lived assets. |
Accounting Pronouncements Recently Adopted
In May 2020, the SEC adopted the final rule under SEC release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, amending Rule 1-02(w)(2) which includes amendments to certain of its rules and forms related to the disclosure of financial information regarding acquired or disposed businesses. Among other changes, the amendments impact SEC rules relating to (1) the definition of “significant” subsidiaries, (2) requirements to provide financial statements for “significant” acquisitions, and (3) revisions to the formulation and usage of pro forma financial information. The final rule is effective on January 1, 2021; however, voluntary early adoption is permitted. The Company early adopted the provisions of the final rule in the third quarter of fiscal 2020. The guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use (ROU) asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases Topic 842 Target improvements, which provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which further clarifies the determination of fair value of the underlying asset by lessors that are not manufacturers or dealers and modifies transition disclosure requirements for changes in accounting principles and other technical updates.
We adopted this standard using the optional transition method and recorded an adjustment to the Consolidated Condensed Balance Sheet on November 1, 2019. We have implemented changes to certain business processes, systems and internal controls to support adoption of the new standard and the related disclosure requirements, including the implementation of a third-party leasing software solution. We elected the package of transition expedients, which allows us to keep our existing lease classifications and not reassess whether any existing contracts as of the date of adoption are leases or contain leases and not reassess initial direct costs. In addition, we elected the practical expedients to combine lease and non-lease components for our leases, and for leases with an initial term of 12 months or less to recognize the associated lease payments in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease term.
As of July 31, 2020, the aggregate balances of lease right-of-use assets and lease liabilities were $258.9 million and $271.0 million, respectively. The standard did not affect our Consolidated Statements of Income and Comprehensive
9
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Income or Consolidated Condensed Statements of Cash Flows. We will continue to disclose comparative reporting periods prior to November 1, 2019 under the previous accounting guidance, ASC 840 Leases.
Accounting Pronouncements Issued Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequent amendments to the initial guidance: ASU 2018-19 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, ASU 2019-05 “Financial Instruments-Credit Losses”, ASU 2019-11 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (collectively, “Topic 326”), ASU 2020-02 Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842) and ASU 2020-03 Codification Improvements to Financial Instruments. Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means it will be effective for our fiscal year beginning November 01, 2020. Early adoption is permitted. We are currently evaluating the impact of Topic 326 on our Consolidated Condensed Financial Statements.
The Company's exposure to credit losses may increase if our customers are adversely affected by changes in healthcare laws, coverage or governmental and insurance reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the current COVID-19 pandemic, or other customer-specific factors. Although the Company has historically not experienced significant credit losses, it is possible that there could be an adverse impact as cash flows are impacted by responses of customers to the COVID-19 pandemic.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), Clarifying the Interaction between Topic 808 and Topic 606. This guidance amended Topic 808 and Topic 606 to clarify that transactions in a collaborative arrangement should be accounted for under Topic 606 when the counterparty is a customer for a distinct good or service (i.e., unit of account). The amendments preclude an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, which means it will be effective for our fiscal year beginning November 1, 2020. Early adoption is permitted. The adoption of this guidance will not have a material impact on our Consolidated Condensed Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions to the general principles in Topic 740 and enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact of ASU 2019-12 on our Consolidated Condensed Financial Statements, which is effective for the Company in our fiscal year and interim periods beginning on November 1, 2021.
In January 2020, the FASB issued ASU 2020-01 Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This guidance addresses accounting for the transition into and out of the equity method and provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact of ASU 2020-01 on our Consolidated Condensed Financial Statements, which is effective for the Company in our fiscal year and interim periods beginning on November 1, 2021.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging
10
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact of ASU 2020-04 on our Consolidated Condensed Financial Statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This update amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity's own equity and improves and amends the related EPS guidance for both Subtopics. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021, which means it will be effective for our fiscal year beginning November 1, 2022. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of ASU 2020-06 on our Consolidated Condensed Financial Statements.
11
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 2. Leases
The Company primarily has operating leases for office, manufacturing and warehouse space, vehicles, and office equipment. Our leases expire on various dates between 2020 and 2045, some of which could include options to extend the lease.
Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As these leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease's commencement date in determining the present value of lease payments. We consider information including, but not limited to, the lease term, our credit rating and interest rates of similar debt instruments with comparable credit ratings and security interests. The lease right-of-use assets are increased by any lease prepayments made and reduced by any lease incentives such as tenant improvement allowances. Options to extend the lease term are included in the lease term when it is reasonably certain that we will exercise the extension option.
The Company’s operating leases typically include non-lease components such as common-area maintenance costs. We have elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments.
Leases with a term of one year or less are not recognized on our Consolidated Condensed Balance Sheet, while the associated lease payments are recorded in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease term.
Commitments under finance lease arrangements of $2.1 million as of July 31, 2020 are not significant and are not included in the disclosure tables below.
The following table presents information about leases on the Consolidated Condensed Balance Sheet:
(In millions) | July 31, 2020 | ||
Operating Leases | |||
Operating lease right-of-use assets | $ | ||
Operating lease liabilities, current | |||
Operating lease liabilities, non-current | |||
Total operating lease liabilities | $ | ||
Weighted average remaining lease term (in years) | |||
Weighted average discount rate | % | ||
The following table presents information about lease expense in our Consolidated Statements of Income and Comprehensive Income:
Periods Ended July 31, | Three Months | Nine Months | |||||
(In millions) | 2020 | 2020 | |||||
Operating lease expense | $ | $ | |||||
Short-term lease expense | |||||||
Variable lease expense | $ | $ | |||||
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
The following table presents supplemental cash flow information about the Company’s leases:
Periods Ended July 31, | Three Months | Nine Months | |||||
(In millions) | 2020 | 2020 | |||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||
Operating cash flows from operating leases | $ | $ | |||||
Maturity of Lease Liabilities
The minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of July 31, 2020 are:
(In millions) | |||
Remainder of 2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
2025 and thereafter | |||
Total lease payments | |||
Less: interest | |||
Present value of lease liabilities | $ | ||
As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2019, and under previous lease accounting standard ASC 840, Leases, the aggregate future noncancelable minimum rental payments on its operating leases, as of October 31, 2019, were as follows:
(In millions) | |||
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
2025 and thereafter | |||
Total future minimum lease payments | $ | ||
13
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 3. Acquisitions
The following is a summary of the allocation of the total purchase consideration for business and asset acquisitions that the Company completed during fiscal 2020 and 2019:
(In millions) | July 31, 2020 | October 31, 2019 | |||||
Customer relationships | $ | $ | |||||
Technology | |||||||
Trademarks | |||||||
Other | |||||||
Total identifiable intangible assets | $ | $ | |||||
Goodwill | |||||||
Net tangible assets | |||||||
Total purchase price | $ | $ | |||||
All acquisitions were funded by cash generated from operations or facility borrowings.
For business acquisitions, we recorded tangible and intangible assets acquired and liabilities assumed at their fair values as of the applicable date of acquisition. For asset acquisitions, we recorded tangible and intangible assets acquired and liabilities assumed at their estimated and relative fair values as of the applicable date of acquisition.
We believe these acquisitions strengthen CooperSurgical's and CooperVision's businesses through the addition of new distributors or complementary products and services.
The pro forma results of operations have not been presented because the effect of the business combinations described below were not material to our consolidated results of operations.
Fiscal Year 2020
On December 13, 2019, CooperSurgical completed the acquisition of a privately-held distributor of in vitro fertilization (IVF) medical devices and systems. The purchase price allocation is preliminary and we are in the process of finalizing information and the corresponding impact on goodwill.
Fiscal Year 2019
On December 28, 2018, CooperVision completed the acquisition of Blanchard Contact Lenses. Blanchard is a privately-held scleral lens company, which expands CooperVision's specialty and scleral lens portfolio.
Note 4. Inventories
(In millions) | July 31, 2020 | October 31, 2019 | |||||
Raw materials | $ | $ | |||||
Work-in-process | |||||||
Finished goods | |||||||
Total inventories | $ | $ | |||||
Inventories are stated at the lower of cost and net realizable value. Cost is computed using standard cost that approximates actual cost, on a first-in, first-out basis.
14
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 5. Intangible Assets
Goodwill
(In millions) | CooperVision | CooperSurgical | Total | ||||||||
Balance at October 31, 2019 | $ | $ | $ | ||||||||
Current period additions | |||||||||||
Foreign currency translation adjustment | |||||||||||
Balance at July 31, 2020 | $ | $ | $ | ||||||||
The Company evaluates goodwill for impairment annually during the fiscal third quarter and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. The Company accounts for goodwill, evaluates and tests goodwill balances for impairment in accordance with related accounting standards.
The Company performed an annual impairment assessment in third quarter of fiscal 2020 and 2019, and its analysis indicated that there was no impairment of goodwill in reporting units. Qualitative factors considered in the assessment include industry and market considerations, overall financial performance and other relevant events and factors affecting each reporting unit. Based on our qualitative assessment, if we determine that the fair value of a reporting unit is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value of the reporting unit. A reporting unit is the level of reporting at which goodwill is tested for impairment. Our reporting units are CooperVision, Office/Surgical and Fertility, reflecting the current way we manage our business.
Goodwill impairment analysis and measurement is a process that requires significant judgment. If our common stock price trades below book value per share, there are changes in market conditions or a future downturn in our business, or a future goodwill impairment test indicates an impairment of our goodwill, we may have to recognize a non-cash impairment of goodwill that could be material and could adversely affect our results of operations in the period recognized and also adversely affect our total assets and stockholders' equity.
Given the general deterioration in economic and market conditions surrounding the COVID-19 pandemic, the Company considered the impact that the COVID-19 pandemic may have on its near and long-term forecasts and determined that it was not more likely than not that the fair value of reporting units or relevant asset groups was below carrying amounts, and therefore the Company determined that there was no impairment to either its goodwill, definite-lived or indefinite-lived intangible assets at July 31, 2020.
15
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Other Intangible Assets
July 31, 2020 | October 31, 2019 | ||||||||||||||||
(In millions) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Weighted Average Amortization Period (in years) | ||||||||||||
Intangible assets with definite lives: | |||||||||||||||||
Trademarks | $ | $ | $ | $ | |||||||||||||
Composite intangible asset | |||||||||||||||||
Technology | |||||||||||||||||
Customer relationships | |||||||||||||||||
License and distribution rights and other | |||||||||||||||||
$ | $ | ||||||||||||||||
Less: accumulated amortization and translation | |||||||||||||||||
Intangible assets with definite lives, net | |||||||||||||||||
Intangible assets with indefinite lives, net (1) | |||||||||||||||||
Total other intangibles, net | $ | $ | |||||||||||||||