Cooper Companies, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended October 31, 2016. The filing also reports fourth-quarter results. Cooper operates CooperVision, a contact lens business, and CooperSurgical, focused on women’s health, fertility and diagnostics.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1.967 billion | $1.797 billion | +9% |
| Gross profit / margin | $1.173 billion / 60% | $1.070 billion / 60% | Gross profit +10% |
| Operating income / margin | $324.1 million / 16% | $236.7 million / 13% | +37% |
| Net income attributable to Cooper stockholders | $273.9 million | $203.5 million | +35% |
| Diluted EPS | $5.59 | $4.14 | +35% |
| Cash from operating activities | $509.6 million | $391.0 million | +30% |
| Capital expenditures | $152.6 million | $243.0 million | Down $90.4 million |
| Interest expense | $26.2 million | $18.1 million | +45% |
Fourth-quarter FY2016 revenue was $518.7 million, versus $455.5 million in the prior-year quarter. Net income attributable to Cooper stockholders was $60.5 million and diluted EPS was $1.23, compared with $36.7 million and $0.75. Fourth-quarter gross profit was $296.0 million, versus $253.3 million.
CooperVision revenue grew 6% to $1.577 billion; silicone hydrogel products were 60% of segment sales, up from 55%. CooperSurgical revenue grew 26% to $389.6 million, with fertility sales rising 67% to $175.8 million, primarily reflecting acquisitions. More than half of company sales were outside the United States.
Liquidity, debt and capital
At year-end, cash was $100.8 million, working capital was $398.0 million, and total debt was $1.334 billion, down from $1.349 billion. The company had $999.8 million available under its revolving credit facility. Its reported leverage ratio was 1.95:1 against a maximum of 3.75:1; interest coverage was 24.27:1 against a minimum of 3.00:1. Management said cash, operating cash flow and borrowing capacity should fund operations and expected requirements, while noting additional borrowing could be sought depending on the size and timing of business activities. Cash was predominantly held outside the United States.
Investing cash outflow was $418.8 million, including $266.1 million for acquisitions. The annual dividend remained $0.06 per share. No shares were repurchased in FY2016.
Changes, outlook and notable items
- Revenue growth was driven by CooperVision product volume and silicone hydrogel sales, and by CooperSurgical acquisitions. Foreign exchange reduced CooperVision revenue by $22.6 million.
- FY2016 included $95.1 million of acquisition, integration, restructuring and certain legal costs, as well as $60.8 million of intangible amortization. Sauflon-related restructuring activities were completed; total restructuring costs under the plan were $148.3 million.
- Management expressed long-term optimism but warned that economic uncertainty, currency volatility, Brexit-related uncertainty and health-care consolidation could weigh on FY2017 performance. It said market growth could be below historical levels. No numerical FY2017 revenue or earnings guidance is provided in the filing.
- FY2016 comprehensive loss attributable to Cooper stockholders was $24.0 million despite positive net income, chiefly reflecting a $289.6 million foreign-currency translation loss in other comprehensive income.
- CooperSurgical acquired several fertility and genetics businesses during FY2016. After year-end, it acquired Wallace for approximately $168 million in November 2016.
- More than 50 putative consumer class actions over contact-lens unilateral pricing policies remained in discovery. The company denied the allegations and said a loss was not considered probable and could not be reasonably estimated. A separate $17 million patent-dispute settlement with Johnson & Johnson was paid in FY2015.
- Key risks include intense competition, acquisition integration and leverage, currency and interest-rate exposure, sole-source silicone hydrogel materials, regulatory and reimbursement changes, genetic-test oversight, litigation, and manufacturing, ERP and cybersecurity disruptions. A single CooperVision distributor accounted for approximately 11% of FY2016 consolidated revenue.
Most important facts for investors to verify
- Whether underlying growth and margins remain strong after separating acquired revenue and nonrecurring restructuring, integration and legal costs.
- Progress integrating CooperSurgical acquisitions, including Wallace, and the profitability and cash contribution of acquired fertility and genetics businesses.
- Debt maturities, variable-rate exposure, covenant headroom and the company’s ability to fund acquisitions and investment without materially increasing leverage.
- Developments in the contact-lens pricing litigation, tax examinations and potential regulatory changes affecting genetic testing and medical devices.
- Exposure to foreign exchange, the concentrated distributor relationship and reliance on sole suppliers for certain silicone hydrogel inputs.
The independent auditor reported that the financial statements were fairly presented under U.S. GAAP and that internal control over financial reporting was effective as of October 31, 2016.