Cooper Companies, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended October 31, 2017. The filing also reports fourth-quarter results for the three months ended October 31, 2017. Amounts are in U.S. dollars.
Business context
Cooper operates through CooperVision, which develops and sells contact lenses, and CooperSurgical, which focuses on women’s health, fertility, diagnostics and related medical products and services. CooperVision generated about 78% of fiscal 2017 revenue; CooperSurgical generated about 22%.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $2.139 billion | $1.967 billion | +9% |
| Gross profit / margin | $1.366 billion / 64% | $1.173 billion / 60% | Margin +4 percentage points |
| Operating income / margin | $429.1 million / 20% | $324.1 million / 16% | +32% |
| Net income attributable to Cooper stockholders | $372.9 million | $273.9 million | +36% |
| Diluted EPS | $7.52 | $5.59 | +35% |
| Cash from operations | $593.6 million | $509.6 million | +16% |
Fiscal 2017 fourth-quarter sales were $561.5 million, versus $518.7 million a year earlier; net income attributable to Cooper stockholders was $88.6 million versus $60.5 million, and diluted EPS was $1.78 versus $1.23.
- Segments: CooperVision sales rose 6% to $1.674 billion; operating income increased to $418.4 million from $309.8 million. Silicone hydrogel products grew 16% and represented 65% of CooperVision sales. CooperSurgical sales rose 19% to $464.9 million, primarily reflecting acquired fertility products and services; operating income was $58.5 million, down 3%.
- Cash and liquidity: Year-end cash was $88.8 million, working capital $557.1 million, and available capacity under the revolving facility $676.7 million. Capital expenditures were $127.2 million; acquisition cash payments were $254.1 million.
- Debt: Total debt was $1.173 billion at October 31, 2017, down from $1.334 billion a year earlier. The company reported compliance with debt covenants, with a 1.53:1 total leverage ratio against a maximum of 3.75:1.
- Other metrics: Effective tax rate was 5.3%, compared with 7.0% in FY2016. Goodwill was $2.355 billion and other intangible assets were $504.7 million. The company paid $0.06 per share in dividends and repurchased $55.0 million of shares.
Material changes and notable items
- Consolidated sales increased 9%. CooperVision growth reflected higher volumes, silicone hydrogel products and market gains; foreign exchange reduced its sales by $19.8 million. CooperSurgical growth was primarily acquisition-driven, and fertility products increased to 54% of that segment’s sales from 45%.
- Gross margin improved mainly from CooperVision’s product mix and currency effects, including a weaker British pound lowering costs. CooperVision also recorded $17.2 million of costs related to Hurricane Maria impacts in Puerto Rico, the Avaira product transition and facility start-up.
- On November 1, 2017, CooperSurgical acquired the PARAGARD IUD business for $1.1 billion. The company funded the transaction with a new five-year, $1.425 billion senior unsecured term loan, using part of the proceeds to repay revolving borrowings. Management expected interest expense to increase in FY2018. On December 1, 2017, CooperVision acquired Paragon Vision Sciences for approximately $80 million.
- In FY2017, the company recorded a $13.5 million discrete tax benefit from adopting share-based compensation accounting guidance. The U.S. tax reform law was enacted December 22, 2017; its effect was still being evaluated and was to be reflected in FY2018 first-quarter results.
- A $3.0 million accrual was recorded for a settlement, subject to court approval, of contact-lens consumer claims involving unilateral pricing policies. The company reported that other ordinary-course legal matters could not be reliably estimated.
Outlook, risks and contingencies
Management expressed optimism about long-term contact lens and health care markets, but provided no quantified FY2018 revenue or earnings guidance in the supplied filing text. It cited expectations for continued growth in single-use and silicone hydrogel lenses and ongoing investment in CooperSurgical fertility, women’s health and diagnostics offerings.
- On December 20, 2017, U.K. tax authorities issued a diverted-profits-tax charging notice of approximately GBP 31 million concerning the valuation of intellectual property transferred in connection with the Sauflon acquisition. The company stated that it would contest the notice; the outcome is uncertain and could adversely affect financial results.
- Key risks include intense competition and product innovation, successful integration and returns from acquisitions, regulatory approvals and compliance, product liability and recalls, reliance on a sole supplier for certain silicone hydrogel materials, foreign exchange and interest-rate exposure, and cybersecurity/ERP implementation risks.
- A hypothetical 5% decrease in foreign currency exchange rates versus the U.S. dollar was estimated to reduce FY2017 operating income by approximately $25 million. A 1 percentage-point change in interest rates was estimated to change annual interest expense by approximately $11.1 million based on FY2017 average debt.
- One CooperVision distributor accounted for approximately 11% of consolidated revenue in both FY2017 and FY2016. The company also noted that more than half of sales were outside the United States.
Important facts for investors to verify
- PARAGARD’s post-acquisition revenue, earnings contribution, purchase accounting and the effect of the $1.425 billion term loan on leverage, interest expense and covenant headroom.
- Resolution and potential financial exposure from the U.K. diverted-profits-tax notice, as well as court approval and final costs of the contact-lens pricing settlement.
- The eventual impact of U.S. tax reform on the effective tax rate, deferred tax balances and cash taxes.
- Whether CooperVision sustains silicone hydrogel growth and margin gains while managing the Puerto Rico disruption, product transitions and foreign-exchange effects.
- Acquisition integration outcomes, CooperSurgical profitability and the company’s substantial goodwill and intangible-asset balances.