Cooper Companies, Inc. — FY2019 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended October 31, 2019. Cooper is a global medical-device company operating through CooperVision, which makes contact lenses, and CooperSurgical, which serves women’s health, fertility, diagnostics and contraception markets.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $2,653.4 million | $2,532.8 million | +5% |
| Gross profit / margin | $1,756.8 million / 66% | $1,632.3 million / 64% | Margin +2 percentage points |
| Operating income | $546.7 million | $403.1 million | +36% |
| Income before taxes | $477.4 million | $331.9 million | +44% |
| Net income | $466.7 million | $139.9 million | +233% |
| Diluted EPS | $9.33 | $2.81 | +232% |
| Operating cash flow | $713.2 million | $668.9 million | +7% |
| Capital expenditures | $292.1 million | $193.6 million | +$98.5 million |
FY2019 net sales grew 5% in both segments: CooperVision sales were $1,972.9 million and CooperSurgical sales were $680.5 million. CooperVision growth was led by single-use spheres (+9%) and toric lenses (+5%); silicone hydrogel products rose 9% and represented 72% of CooperVision sales. CooperSurgical office and surgical sales rose 6%, while fertility sales rose 3%.
Fiscal fourth-quarter sales were $691.6 million, gross profit $455.0 million, income before taxes $128.5 million, net income $121.0 million and diluted EPS $2.42. The comparable FY2018 fourth quarter reported sales of $651.5 million, gross profit of $430.0 million, net income of $100.6 million and diluted EPS of $2.02.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $89.0 million at year-end, predominantly held outside the United States. Working capital fell to $52.8 million from $554.4 million, primarily reflecting a $500 million short-term term loan classified as current debt.
- Total debt, net of issuance costs, was $1.826 billion, down from $2.023 billion. Debt-to-equity was 0.50:1; debt was 33% of total capitalization. The company had $734.8 million available under its revolving credit facility.
- Operating cash flow was $713.2 million; investing activities used $351.3 million and financing activities used $351.4 million. Cash flow after capital expenditures was approximately $421 million, calculated as operating cash flow less capital expenditures.
- Debt included $1.0 billion outstanding under a term loan maturing in 2022, a $500 million term loan maturing in September 2020, and $264 million drawn on a revolving facility maturing in 2021. The company reported compliance with its debt covenants.
- Repurchased 537,000 shares for $156.1 million during FY2019, including 512,000 shares for $150 million in the fourth quarter. The annual dividend remained $0.06 per share.
Material changes and unusual items
- Net income and EPS comparisons are strongly affected by FY2018’s $214.6 million tax expense related to U.S. tax reform. The FY2019 effective tax rate was 2.3%, versus 57.9% in FY2018; FY2019’s rate reflected foreign earnings in lower-tax jurisdictions and tax-audit settlement benefits, among other items.
- Operating income included a $19.0 million gain from selling CooperSurgical’s U.S. Filshie Clip distribution right for $21.0 million. CooperSurgical operating results also benefited from comparison with FY2018 charges, including $49.3 million of acquisition inventory step-up charges and a $24.4 million intangible impairment.
- CooperVision gross margin declined to 65% from 66%, including $14.0 million of product-transition, integration and manufacturing costs and adverse foreign exchange and mix effects. CooperSurgical gross margin increased to 69% from 61%, partly reflecting the prior-year acquisition-related charges.
- Foreign exchange reduced FY2019 sales by approximately $53.6 million. The company reported no foreign-exchange or interest-rate hedging transactions outstanding at year-end.
- FY2019 acquisitions included Blanchard Contact Lenses and Incisive Surgical. Prior-year acquisitions included PARAGARD for approximately $1.1 billion and LifeGlobal, among others.
Outlook, risks and contingencies
Management expressed optimism about long-term contact-lens and health-care market prospects but gave no specific FY2020 revenue or earnings guidance in the supplied filing text. It cited uncertainty from foreign-exchange movements, trade barriers and tariffs, Brexit, tax-law changes and health-care customer consolidation. Management said available cash, operating cash flow and borrowing capacity should meet anticipated needs for at least 12 months after the financial statements’ issuance.
- In November 2019, after fiscal year-end, CooperVision received FDA approval for MiSight 1day, a lens indicated to slow myopia progression in children; U.S. availability was expected in 2020.
- Key risks include intense competition and product adoption, acquisition integration, dependence on certain sole-source materials, manufacturing or distribution disruptions, regulatory approvals and compliance (including EU MDR/IVDR), reimbursement and pricing pressures, cybersecurity and ERP implementation, foreign currency and variable-rate debt exposure, and uncertain tax positions.
- The company had $49.7 million of gross unrecognized tax benefits; the auditor identified assessment of these tax positions as a critical audit matter. Approximately $21.7 million of unrecognized tax benefits could change significantly within 12 months.
- A $3.0 million settlement of contact-lens pricing class-action claims had been placed in escrow; final court approval was scheduled for February 25, 2020. The company stated that other ordinary-course legal matters were not expected to materially affect its financial condition or results.
- The company expected adoption of the new lease standard to add approximately $263.1 million of right-of-use assets and $271.9 million of lease liabilities to the balance sheet beginning November 1, 2019, with an immaterial income-statement and cash-flow impact.
KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded that disclosure controls and internal controls were effective.
Most important facts for investors to verify
- How much FY2019 earnings growth reflects operating improvement versus the unusually high FY2018 tax expense, and whether the 2.3% FY2019 effective tax rate is sustainable.
- Progress in refinancing or repaying the $500 million term loan due in September 2020, and effects of variable rates and the transition away from LIBOR.
- Whether CooperVision’s silicone hydrogel and single-use growth continues to offset foreign-exchange pressure and weaker legacy hydrogel products.
- Whether CooperSurgical sustains margin improvement after acquisition-related charges and the Filshie Clip gain, and how the fertility portfolio performs after exiting carrier screening and NIPT.
- Final court approval and any further developments in the contact-lens pricing settlement, plus changes in tax exposures and regulatory costs.