Business context and reporting period
The Cooper Companies, Inc. is a global medical-device company operating through CooperVision, which makes contact lenses, and CooperSurgical, which serves women’s and family health, fertility, diagnostics and contraception markets. This Form 10-K covers the fiscal year ended October 31, 2018; fourth-quarter figures are also provided.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,532.8 million | $2,139.0 million |
| Gross profit / margin | $1,632.3 million / 64% | $1,365.8 million / 64% |
| Operating income | $403.1 million | $429.1 million |
| Income before income taxes | $331.9 million | $394.0 million |
| Net income attributable to Cooper stockholders | $139.9 million | $372.9 million |
| Diluted EPS | $2.81 | $7.52 |
| Cash from operating activities | $668.9 million | $593.6 million |
- Sales increased 18%. CooperVision sales rose 12% to $1,882.0 million; CooperSurgical sales rose 40% to $650.8 million, primarily reflecting the PARAGARD acquisition.
- Operating income fell 6%; operating margin was 16% versus 20%. Interest expense increased to $82.7 million from $33.4 million.
- Cash and cash equivalents were $77.7 million, working capital was $554.4 million, and total debt was $2,022.8 million at year-end. Debt-to-equity was 0.61:1. The company reported $560.5 million available under its revolving facility and compliance with its debt covenants.
- Capital expenditures were $193.6 million. Cash used in investing activities was $1,517.5 million, including $1,323.9 million for acquisitions and related items.
- Fourth-quarter net sales were $651.5 million, net income attributable to Cooper stockholders was $100.6 million, and diluted EPS was $2.02.
Material changes versus the prior year
- Net income and diluted EPS declined sharply, principally because of $214.6 million in provisional tax expense related to U.S. tax reform, higher acquisition-related amortization, and a $24.4 million intangible-asset impairment.
- CooperSurgical acquired PARAGARD for approximately $1.1 billion and acquired LifeGlobal; CooperVision acquired Paragon Vision Sciences and Blueyes. The acquisitions contributed to a substantial increase in debt and intangible assets.
- CooperVision sales benefited from volume growth, silicone-hydrogel products and favorable foreign exchange. Silicone-hydrogel products grew 19% and represented 69% of CooperVision sales, compared with 65% in FY2017.
- CooperSurgical exited its carrier-screening and non-invasive prenatal testing product lines after the Recombine-related impairment. Related exit and restructuring charges were approximately $10 million; management said the product lines’ net loss was not material to consolidated results.
- Operating cash flow increased 12.7%, despite lower net income, in part because of higher non-cash charges and changes in liabilities.
Outlook, risks and unusual items
- Management expressed optimism about long-term prospects for contact lenses and general health care, but provided no quantitative revenue or earnings guidance in the supplied filing text. Priorities include expanding silicone-hydrogel products, growing internationally and integrating acquisitions.
- Management expects current cash, cash equivalents and operating cash flow to cover anticipated needs for at least 12 months. On November 1, 2018, the company entered a $400 million, 364-day term loan and used the proceeds to partially repay revolving-credit borrowings.
- The 2017 U.S. Tax Cuts and Jobs Act drove the provisional $214.6 million tax charge, including a $185.7 million transition-tax component. The company had recorded $153.8 million in transition-tax liabilities payable in installments and said its tax accounting remained subject to finalization.
- The U.K. tax authority’s disputed diverted-profits-tax notice was approximately £31 million; the company paid it in January 2018 while contesting the valuation. Management did not expect final resolution to materially affect the financial statements.
- A $3 million settlement of contact-lens pricing-policy litigation was paid into escrow; final court approval remained pending. The company said other ordinary-course legal matters were not expected to have a material adverse effect.
- Key risks include intense competition and product acceptance, acquisition integration and leverage, variable interest rates, foreign-exchange exposure, reliance on some sole-source suppliers, regulatory and reimbursement changes, product liability, data privacy and cybersecurity, and implementation of a new CooperVision ERP system. A 1% interest-rate change was estimated to change annual interest expense by approximately $23.9 million; a hypothetical 5% currency-rate change would affect operating income by approximately $30 million.
- KPMG issued an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of October 31, 2018.
Important facts for investors to verify
- How much of sales growth and future earnings depends on acquired businesses, particularly PARAGARD, and whether anticipated integration benefits materialize.
- The final tax effects of the 2017 Act, including transition-tax estimates, and the outcome of the disputed U.K. tax matter.
- Debt repayment capacity, refinancing requirements, covenant headroom and sensitivity to interest rates.
- Whether CooperSurgical can sustain growth and profitability after the fertility product-line exits and associated impairment and restructuring charges.
- Final court approval and any remaining exposure relating to the contact-lens pricing-policy settlement.