Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Note numbers refer to “Notes to Consolidated Financial Statements” in Item 8. Financial Statements and Supplementary Data.
RESULTS OF OPERATIONS
In this section, we discuss the results of our operations for fiscal 2020 compared with fiscal 2019. We discuss our cash flows and current financial condition under “Capital Resources and Liquidity.” For a discussion related to fiscal 2019 compared with fiscal 2018, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended October 31, 2019, which was filed with the United States Securities and Exchange Commission (SEC) on December 20, 2019, and is available on the SEC's website at www.sec.gov and our Investor Relations website at investor.coopercos.com.
Within the tables presented, percentages are calculated based on the underlying whole-dollar amounts and, therefore, may not recalculate exactly from the rounded numbers used for disclosure purposes.
Non-GAAP Financial Measures
The succeeding sections of Management’s Discussion and Analysis (MD&A) may include certain financial measures that are not defined by accounting principles generally accepted in the United States of America (GAAP). These measures, which are referred to as non-GAAP measures, are listed below:
|
|
•
|
Free Cash Flow - Free cash flow is calculated as net cash provided by operating activities less capital expenditures.
|
|
|
•
|
Constant currency - Constant currency is defined as excluding the effect of foreign currency fluctuations.
|
For a discussion of these measures and the reasons management believes they are useful to investors, refer to “Summary of Non-GAAP Financial Measures” below. To the extent applicable, this MD&A includes reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
The presentation of these non-GAAP financial measures is not intended to be a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP and may be different from non-GAAP financial measures used by other companies, and therefore, may not be comparable among companies.
COVID-19 Considerations
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 and 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 COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
We have taken an active role in addressing the ongoing pandemic’s impact on our employees, suppliers, distribution channels, operations and customers, including taking precautionary measures, such as implementing contingency plans, and making operational adjustments as necessary. We have taken measures to help ensure the safety of our personnel in all our facilities, and we have endeavored and continue to follow recommended actions of government and health authorities to protect our employees worldwide.
As of the date of this filing, we have not experienced any significant disruption at our manufacturing facilities. We have had no significant disruption in our access to necessary raw materials and other supplies or with our distribution network; however, we have experienced higher unabsorbed fixed overhead costs, labor inefficiencies, higher cost of production and higher freight charges as a result of the COVID-19 pandemic. As a result, we instituted an inventory control project to reduce buildup of excess inventory. Our manufacturing and distribution operations have responded to the impacts related to the COVID-19 pandemic, and we have been able to continue to supply our products around the world without interruption. In the future, we may decide or need to implement additional precautionary measures or operational adjustments as we deem prudent to meet consumer demand or to help further ensure employee safety. We believe that the actions we are taking have enabled us to keep our employees safe and our supply chain intact and will help us emerge from this global pandemic operationally sound and well positioned for long-term growth.
The extent to which the global COVID-19 pandemic and related economic disruptions impact our business, results of operations, cash flow and financial condition will depend on future developments. At this time, future developments are highly uncertain, difficult to predict and largely outside of our control. These include, but are not limited to, the spread, duration and severity of the pandemic outbreak and any subsequent waves of additional outbreaks, actions taken by governments to contain the pandemic, address its impact or respond to the reduction in global and local economic activity, and how quickly and to what extent normal economic and operating conditions can resume. We will continue to closely monitor the developments relating to the COVID-19 pandemic and the responses from governments and private sector participants and their respective impact on our Company and on our customers, suppliers, vendors and business partners.
For more information on the risks associated with the COVID-19 pandemic, refer to Part I, Item 1A, "Risk Factors" herein.
Outlook
Overall, we remain optimistic about the long-term prospects for the worldwide contact lens and general health care markets. However, the impact, risks and uncertainty relating to the global COVID-19 pandemic and related economic disruptions, as further described in the “COVID-19 Considerations” section above and in the “Risk Factors” section in Part I, Item 1A of this filing, have adversely affected our sales, cash flow and current performance and are likely to further adversely affect our future sales, cash flow and performance. Additionally, other events affecting the economy as a whole, including but not limited to the uncertainty and instability of global markets driven by foreign currency volatility, changes in tax legislation, debt concerns, the uncertainty during and after the transition period following the United Kingdom's withdrawal from the EU, changes to existing regulations and new regulations, global trade barriers including additional tariffs and the trend of consolidations within the health care industry could impact our current performance and continue to represent a risk to our future performance.
CooperVision - We compete in the worldwide contact lens market with our spherical, toric, multifocal, toric multifocal and myopia management contact lenses offered in a variety of materials including using silicone hydrogel Aquaform® technology, PC Technology™ and ActivControl™ technology. We believe that there will be lower contact lens wearer dropout rates as technology improves and enhances the
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
wearing experience through a combination of improved designs and materials and the growth of preferred modalities such as single-use and monthly wearing options. CooperVision also competes in the myopia management and specialty eye care markets with products such as ortho-k and scleral lenses. In November 2019, CooperVision received United States Food and Drug Administration (FDA) approval for its MiSight® 1 day lens, which is the first and only FDA-approved product indicated to slow the progression of myopia in children with treatment initiated between the ages of 8-12 and became available in the United States during fiscal 2020. CooperVision is focused on greater worldwide market penetration using recently introduced products, and we continue to expand our presence in existing and emerging markets, including through acquisitions.
On August 7, 2020, CooperVision completed the acquisition of a privately-held U.S contact lens manufacturer focusing on ortho-k lenses. This acquisition expands CooperVision’s specialty eye care portfolio and its leadership in addressing the increasing severity and prevalence of myopia.
On December 28, 2018, CooperVision completed the acquisition of a privately-held scleral lens company, which expands CooperVision's specialty and scleral lens portfolio.
Our ability to compete successfully with a full range of silicone hydrogel products is an important factor to achieving our desired future levels of sales growth and profitability. CooperVision manufactures and markets a wide variety of silicone hydrogel contact lenses. Our single-use silicone hydrogel product franchises, clariti® and MyDay®, remain a focus as we expect increasing demand for these products as well as future single-use products as the global contact lens market continues to shift to this modality. Outside of single-use, the Biofinity® and Avaira Vitality® product families comprise our focus in the FRP, or frequent replacement product, market which encompasses the 2-week and monthly modalities. Included in this segment are unique products such as Biofinity Energys®, which helps individuals with digital eye fatigue.
CooperSurgical - Our CooperSurgical business competes in the general health care market with a commitment to advancing the health of women, babies and families through its diversified portfolio of products and services focusing on women's health and fertility. CooperSurgical has established its market presence and distribution system by developing products and acquiring companies, products and services that complement its business model.
CooperSurgical acquired a privately-held distributor of IVF medical devices and systems on December 13, 2019.
On December 31, 2018, CooperSurgical acquired a privately-held U.S. medical device company that develops mechanical surgical solutions for skin closure.
Capital Resources - At October 31, 2020, we had $115.9 million in unrestricted cash, primarily held outside the United States, and $754.6 million available under our 2020 Revolving Credit Facility. Debt outstanding at October 31, 2020 primarily consisted of:
|
|
•
|
$850.0 million term loan entered into on April 1, 2020
|
|
|
•
|
$534.0 million drawn under our 2020 Revolving Credit Facility entered into on April 1, 2020
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|
|
•
|
$350.0 million term loan entered into on October 16, 2020
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See Note 5. Debt of the Consolidated Financial Statements for additional information.
Transition from LIBOR
The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Rate (LIBOR), announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. Further, in March 2020, the Financial Accounting Standards Board (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 GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company has material contracts that are indexed to LIBOR and is continuing to monitor this activity and evaluate the related risk. We are continuing to evaluate the scope of impacted contracts and the potential impact. We are also monitoring the developments regarding alternative rates and may amend certain contracts to accommodate those rates if the contract does not already specify a replacement rate. While the notional value of agreements potentially indexed to LIBOR is material, we are not yet able to reasonably estimate the expected impact.
We believe that current cash, cash equivalents and future cash flow from operating activities will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the financial statements included in this annual report. To the extent additional funds are necessary to meet our liquidity needs such as that for acquisitions, share repurchases, cash dividends or other activities as we execute our business strategy, we anticipate that additional funds will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2020 Compared with 2019
Highlights: 2020 vs. 2019
|
|
•
|
Gross margin decreased to 63% of net sales compared with 66% in fiscal 2019, primarily due to the negative impact of the COVID-19 pandemic on net sales and cost of sales
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|
|
•
|
Operating income decreased 43% to $311.8 million from $546.7 million
|
|
|
•
|
Interest expense decreased to $36.8 million from $68.0 million due to lower average debt balances and lower interest rates
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|
|
•
|
Diluted earnings per share decreased 48% to $4.81 from $9.33
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|
|
•
|
Operating cash flow decreased 32% to $486.6 million from $713.2 million.
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Selected Statistical Information – Percentage of Net Sales
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
2020
|
|
2019
|
2020 vs. 2019 % Change in Absolute Values
|
Net sales
|
100
|
%
|
|
100
|
%
|
(8
|
)%
|
Cost of sales
|
37
|
%
|
|
34
|
%
|
—
|
%
|
Gross profit
|
63
|
%
|
|
66
|
%
|
(13
|
)%
|
Selling, general and administrative expense
|
41
|
%
|
|
38
|
%
|
—
|
%
|
Research and development expense
|
4
|
%
|
|
3
|
%
|
8
|
%
|
Amortization of intangibles
|
6
|
%
|
|
5
|
%
|
(6
|
)%
|
Gain on sale of an intangible
|
—
|
%
|
|
1
|
%
|
—
|
%
|
Operating income
|
13
|
%
|
|
21
|
%
|
(43
|
)%
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CooperVision Net Sales
The contact lens market has two major product categories:
|
|
•
|
Spherical lenses including lenses that correct near- and farsightedness uncomplicated by more complex visual defects
|
|
|
•
|
Toric and multifocal lenses including lenses that, in addition to correcting near- and farsightedness, address more complex visual defects such as astigmatism and presbyopia by adding optical properties of cylinder and axis, which correct for irregularities in the shape of the cornea.
|
CooperVision Net Sales by Category
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2020 vs. 2019 % Change
|
Toric
|
$
|
598.2
|
|
|
$
|
620.0
|
|
|
(4
|
)%
|
Multifocal
|
197.0
|
|
|
202.9
|
|
|
(3
|
)%
|
Single-use spheres
|
529.0
|
|
|
568.2
|
|
|
(7
|
)%
|
Non single-use sphere, other
|
518.8
|
|
|
581.8
|
|
|
(11
|
)%
|
|
$
|
1,843.0
|
|
|
$
|
1,972.9
|
|
|
(7
|
)%
|
In the fiscal year ended October 31, 2020:
|
|
•
|
The COVID-19 pandemic has negatively impacted our business. Net sales in fiscal 2020 declined by 7%, compared to fiscal 2019. Customers have either slowed down purchases or delayed orders due to a desire to reduce inventories, reduced contact lens wear driven by limited social interaction and lack of patient access on account of certain office closures and reduced access as offices reopen. We started experiencing downward pressure on net sales when markets started closing during our second quarter of fiscal 2020 as social restrictions were put in place and the offices of health care providers were closed
|
|
|
•
|
CooperVision’s net sales declined across product categories and all our markets, however the net sales decline was partially offset by higher sales of MyDay, MiSight and Biofinity Energys
|
|
|
•
|
"Other" products primarily include lens care which represented approximately 2% of net sales in fiscal 2020 and 2019
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
|
•
|
Total silicone hydrogel products decreased by 4%, representing 74% of net sales in the fiscal 2020 compared to 72% in fiscal 2019
|
|
|
•
|
Foreign exchange rates negatively impacted sales by approximately $2.4 million, compared to a negative impact of $53.6 million in fiscal 2019. In fiscal 2020, net sales decreased 6% in constant currency over the prior year
|
|
|
•
|
Sales reduction was primarily driven by a decrease in the volume of lenses sold. Average realized prices by product did not materially influence sales
|
|
|
•
|
We expect to continue seeing downward pressure on net sales if the COVID-19 pandemic continues, optical retailers and healthcare centers continue to restrict access, and social distancing measures continue.
|
CooperVision Net Sales by Geography
CooperVision competes in the worldwide soft contact lens market and services in three primary regions: the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific.
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2020 vs. 2019 % Change
|
Americas
|
$
|
720.3
|
|
|
$
|
763.8
|
|
|
(6
|
)%
|
EMEA
|
690.1
|
|
|
746.5
|
|
|
(8
|
)%
|
Asia Pacific
|
432.6
|
|
|
462.6
|
|
|
(6
|
)%
|
|
$
|
1,843.0
|
|
|
$
|
1,972.9
|
|
|
(7
|
)%
|
CooperVision's regional reduction in net sales was primarily attributable to disruption from the COVID-19 pandemic. We expect to continue seeing downward pressure on net sales if the COVID-19 pandemic continues, optical retailers and healthcare centers continue to restrict access, and social distancing measures continue.
Refer to CooperVision Net Sales by Category above for further discussion.
CooperSurgical Net Sales by Category
CooperSurgical supplies the family health care market with a diversified portfolio of products and services. Our office and surgical offerings include products that facilitate surgical and non-surgical procedures that are commonly performed primarily by OB/GYN in hospitals, surgical centers, fertility clinics and medical offices. Fertility offerings include highly specialized products and services that target the IVF process, including diagnostics testing with a goal to make fertility treatment safer, more efficient and convenient.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The chart below shows the percentage of net sales of office and surgical products and fertility.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
2020 vs 2019 % Change
|
Office and surgical products
|
|
$
|
358.8
|
|
|
$
|
422.4
|
|
|
(15
|
)%
|
Fertility
|
|
229.1
|
|
|
258.1
|
|
|
(11
|
)%
|
|
|
$
|
587.9
|
|
|
$
|
680.5
|
|
|
(14
|
)%
|
In the fiscal year ended October 31, 2020:
|
|
•
|
We have experienced COVID-19 pandemic-related economic disruptions and decline in net sales during fiscal 2020. We experienced downward pressure on revenue when major markets started closing as social restrictions were put in place and the offices of certain health care providers were closed. In response to the COVID-19 pandemic, as a precautionary measure, certain health care facilities and medical offices were closed or restricted access and surgeries and elective medical procedures and exams have been deferred or canceled. Further, there has been a significant reduction in physician office visits, and healthcare centers have postponed or canceled capital purchases
|
|
|
•
|
Office and surgical products decreased compared to the prior year mainly due to reduction in PARAGARD IUD sales. Further, there has been a reduction in revenue from other surgical products such as Uterine Manipulators and Closure products, partially offset by an increase in revenue from Incisive Surgical and Endosee products
|
|
|
•
|
Fertility net sales declined compared to the prior year mainly due to reduction in revenue from IVF consumables and equipment
|
|
|
•
|
Foreign exchange rates negatively impacted sales by approximately $2.1 million, compared to a negative impact of $9.0 million in the prior year. In fiscal 2020, net sales decreased 13% in constant currency over the prior year
|
|
|
•
|
We expect to continue seeing downward pressure on net sales if the COVID-19 pandemic continues, hospitals and healthcare centers continue to restrict access, and social distancing measures continue.
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Margin
Consolidated Gross Margin decreased in fiscal 2020 to 63% compared to 66% of fiscal 2019 due to:
|
|
•
|
Decreased revenue due to negative impact of COVID-19 pandemic
|
|
|
•
|
Increased cost of sales which included $90.1 million of costs primarily related to the COVID-19 pandemic and other manufacturing related costs
|
|
|
•
|
Fiscal 2019 included $28.2 million of primarily product transition, integration and manufacturing related costs.
|
Selling, General and Administrative Expense (SGA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
% Net
Sales
|
|
2019
|
|
% Net
Sales
|
|
2020 vs. 2019
% Change
|
CooperVision
|
$
|
682.3
|
|
|
37
|
%
|
|
$
|
682.4
|
|
|
35
|
%
|
|
—
|
%
|
CooperSurgical
|
261.0
|
|
|
44
|
%
|
|
266.2
|
|
|
39
|
%
|
|
(2
|
)%
|
Corporate
|
49.2
|
|
|
—
|
|
|
47.6
|
|
|
—
|
|
|
3
|
%
|
|
$
|
992.5
|
|
|
41
|
%
|
|
$
|
996.2
|
|
|
38
|
%
|
|
—
|
%
|
SGA expense remained relatively flat in fiscal 2020 compared with fiscal 2019. As a percentage of sales, SGA increased in fiscal 2020 compared to fiscal 2019, due to salaries and benefits, selling, advertising and marketing activities, and fixed General and Administrative (G&A) costs.
CooperVision's SGA remained relatively flat in fiscal 2020 compared to fiscal 2019 primarily due to advertising and marketing activities, including MiSight and increase in G&A costs, partially, offset by lower travel expenses. CooperVision's SGA in fiscal 2020 included $6.5 million primarily related to acquisition and integration activities. CooperVision's SGA in fiscal 2019 included $7.1 million of acquisition costs, integration costs and costs related to new product launches.
The decrease in CooperSurgical's SGA in fiscal 2020 compared to fiscal 2019 was primarily due to lower selling and distribution expenses due to lower sales and savings from lower travel expenses, partially offset by an increase in G&A costs. CooperSurgical's SGA in fiscal 2020, included $19.8 million, primarily related to integration expenses and MDR costs. CooperSurgical's SGA in fiscal 2019 included $19.6 million of acquisition and integration expenses of acquired companies, as well as MDR costs.
Corporate SGA increased in fiscal 2020 compared to fiscal 2019 primarily due to higher share-based compensation expense.
Research and Development Expense (R&D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
% Net
Sales
|
|
2019
|
|
% Net
Sales
|
|
2020 vs. 2019
% Change
|
CooperVision
|
$
|
54.1
|
|
|
3
|
%
|
|
$
|
55.5
|
|
|
3
|
%
|
|
(2
|
)%
|
CooperSurgical
|
39.2
|
|
|
7
|
%
|
|
31.2
|
|
|
5
|
%
|
|
25
|
%
|
|
$
|
93.3
|
|
|
4
|
%
|
|
$
|
86.7
|
|
|
3
|
%
|
|
8
|
%
|
|
|
•
|
CooperVision's R&D decreased in fiscal 2020 compared to fiscal 2019 mainly due to timing of clinical studies. As a percentage of sales, R&D expense remained flat. CooperVision's R&D activities are primarily focused on the development of contact lenses, manufacturing technology and process enhancements
|
|
|
•
|
The increase in CooperSurgical's R&D in fiscal 2020 compared to fiscal 2019 was primarily due to increased investment activities in developing new products and services and upgrades of existing products. CooperSurgical has not paused research programs during the COVID-19
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
pandemic and has maintained its spend on innovations and increased its spend on key regulatory investment areas to support our long-term objectives. As a percentage of sales, R&D expense increased due to increased investment in developing new products coupled with a decline in sales.
|
|
•
|
CooperSurgical's R&D activities include diagnostics, IVF product development and the design and upgrade of surgical procedure devices.
|
Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
% Net
Sales
|
|
2019
|
|
% Net
Sales
|
|
2020 vs. 2019
% Change
|
CooperVision
|
$
|
32.4
|
|
|
2
|
%
|
|
$
|
40.9
|
|
|
2
|
%
|
|
(21
|
)%
|
CooperSurgical
|
104.8
|
|
|
18
|
%
|
|
104.9
|
|
|
15
|
%
|
|
—
|
%
|
|
$
|
137.2
|
|
|
6
|
%
|
|
$
|
145.8
|
|
|
5
|
%
|
|
(6
|
)%
|
CooperVision amortization expense decreased in fiscal 2020 compared to fiscal 2019 due to certain intangible assets becoming fully amortized.
CooperSurgical's amortization expense remained relatively flat.
Gain on Sale of an Intangible Asset
In the second quarter of fiscal 2019, CooperSurgical sold an exclusive distribution right to distribute Filshie Clip System in the United States for $21.0 million and recognized a gain of $19.0 million.
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
% Net
Sales
|
|
2019
|
|
% Net
Sales
|
|
2020 vs. 2019
% Change
|
CooperVision
|
$
|
375.7
|
|
|
20
|
%
|
|
$
|
506.4
|
|
|
26
|
%
|
|
(26
|
)%
|
CooperSurgical
|
(14.7
|
)
|
|
(3
|
)%
|
|
87.9
|
|
|
13
|
%
|
|
(117
|
)%
|
Corporate
|
(49.2
|
)
|
|
—
|
|
|
(47.6
|
)
|
|
—
|
|
|
(3
|
)%
|
|
$
|
311.8
|
|
|
13
|
%
|
|
$
|
546.7
|
|
|
21
|
%
|
|
(43
|
)%
|
The operating income for fiscal 2020 was primarily impacted by the COVID-19 pandemic which resulted from a decrease to our net sales and additional expenses due to the COVID-19 pandemic related costs as discussed above.
CooperVision operating income decreased as a percentage of net sales and in absolute dollars in fiscal 2020 compared to fiscal 2019 primarily due to a decrease in net sales partially offset by a decrease in operating expenses and a decrease in amortization expenses.
CooperSurgical operating income decreased as a percentage of net sales and in absolute dollars in fiscal 2020 compared to fiscal 2019 primarily due to a decrease in net sales and higher R&D expenses to support growth partially offset by a decrease in SGA. In the second quarter of fiscal 2019, CooperSurgical sold an exclusive distribution right to distribute Filshie Clip System in the U.S. for $21.0 million and recognized a gain of $19.0 million.
Corporate operating loss increased in fiscal 2020 compared to fiscal 2019, primarily due to higher stock-based compensation expense.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
On a consolidated basis, operating income decreased in absolute dollars and as a percentage of net sales primarily due to the negative impact of the COVID-19 pandemic, as discussed above.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
% Net
Sales
|
|
2019
|
|
% Net
Sales
|
|
2020 vs. 2019
% Change
|
Interest expense
|
$
|
36.8
|
|
|
2
|
%
|
|
$
|
68.0
|
|
|
3
|
%
|
|
(46
|
)%
|
Interest expense decreased as a percentage of net sales and in absolute dollars during fiscal 2020 primarily due to lower interest rates and lower average debt balances compared to the prior year, partially offset by the write-off of debt issuance costs.
Other Expense (Income), Net
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
Foreign exchange loss
|
$
|
1.2
|
|
|
$
|
2.2
|
|
Other expense (income), net
|
7.3
|
|
|
(0.9
|
)
|
|
$
|
8.5
|
|
|
$
|
1.3
|
|
Foreign exchange loss primarily resulted from the revaluation and settlement of foreign currency-denominated balances.
Other expense (income) increased in fiscal 2020, primarily due to non-consolidated subsidiary investments losses and advances during the year.
Provision for Income Taxes
The Company’s effective tax rate (ETR) was 10.6% and 2.3% for fiscal 2020 and fiscal 2019, respectively. The ETR in fiscal 2020 increased in comparison to fiscal 2019 primarily due to foreign earnings subject to US tax, partially offset by a shift in the geographic mix of income.
The ETR for both fiscal 2020 and fiscal 2019 was less than the US federal statutory tax rate primarily due to foreign earnings in jurisdictions with lower tax rates, a step-up of the US tax-deductible basis of intellectual property rights from intra-entity sales and excess tax benefits from share-based compensation. This was partially offset by foreign earnings subject to US tax. The jurisdictions with lower tax rates with the most significant tax impact include Barbados, Puerto Rico and the United Kingdom. See Note 6. Income Taxes of the Consolidated Financial Statements for additional information.
Share-Based Compensation Plans
We grant various share-based compensation awards, including stock options, performance shares and restricted stock units. The share-based compensation and related income tax benefit recognized in the Consolidated Financial Statements in fiscal 2020 was $38.6 and $4.8, respectively, compared to $36.3 million and $5.1 million, respectively, in fiscal 2019. As of October 31, 2020, there was $82.5 million of total unrecognized share-based compensation cost related to non-vested awards. See Note 9. Stock Plans of the Consolidated Financial Statements for additional information.
We estimate the fair value of each stock option award on the date of grant using the Black-Scholes valuation model, which requires management to make estimates regarding expected option life, stock price volatility and other assumptions. The use of different assumptions could lead to a different estimate of fair value. The expected life of the stock option is based on the observed and expected time to post-vesting forfeiture and/or exercise. Groups of employees that have similar historical exercise behavior are
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
considered separately for valuation purposes. If our assumption for the expected life increased by one year, the fair value of an individual option granted in fiscal 2020 would have increased by approximately $8.08. To determine the stock price volatility, management considers implied volatility from publicly-traded options on the Company's stock at the date of grant, historical volatility and other factors. If our assumption for stock price volatility increased by one percentage point, the fair value of an individual option granted in fiscal 2020 would have increased by approximately $2.37.
Retirement Income Plan Soft Freeze
On June 18, 2019 the Board of Directors of the Company approved a soft freeze of the Plan effective August 1, 2019. The Plan was closed to employees hired on or after August 1, 2019, including former participants or employees rehired on or after August 1, 2019 and employees hired in connection with a stock or asset acquisition, merger or other similar transaction on or after August 1, 2019. Existing employees already covered by the Plan, continue to accrue their benefits. There is no material impact on the Company's results of operations, financial position and cash flows for the fiscal 2020 and 2019.
Employee Stock Purchase Plan
On March 18, 2019, the Company received stockholder approval for the Employee Stock Purchase Plan (ESPP). The first offering period began on November 4, 2019 and offerings are generally made on a quarterly basis. The purpose of the ESPP is to provide eligible employees of the Company with the opportunity to acquire shares of common stock at 85% of the market price on the last business day of each offering period by means of accumulated payroll deductions. Payroll deductions will be limited to 15% of the employee’s eligible compensation, not to exceed $21.3 thousand in any one calendar year. The ESPP initially authorized the issuance of 1,000,000 shares of common stock. These shares will be made available from shares of common stock reacquired by the Company as Treasury Stock. During fiscal year ended October 31, 2020, we issued 11,641 shares to our employees under the ESPP. At October 31, 2020, the number of shares remaining available for future issuance under the ESPP is 988,359 shares. Total ESPP Share-based compensation recognized during the fiscal year ended October 31, 2020 was $0.7 million.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAPITAL RESOURCES AND LIQUIDITY
2020 Highlights
|
|
•
|
Operating cash flow of $486.6 million compared to $713.2 million in fiscal 2019
|
|
|
•
|
Expenditures for purchases of property, plant and equipment of $310.4 million up from $292.1 million in fiscal 2019
|
|
|
•
|
Cash payments for acquisitions and others of $54.1 million compared to $59.2 million in fiscal 2019
|
|
|
•
|
Total debt, net of debt issuance cost, at $1.8 billion at the end of fiscal 2020 compared to $1.8 billion at the end of fiscal 2019
|
|
|
•
|
Cash provided by operations of $486.6 million offset by capital expenditures of $310.4 million resulted in positive free cash flow of $176.2 million, down 58% compared to the prior year period
|
Comparative Statistics
|
|
|
|
|
|
|
Years Ended October 31,
($ in millions)
|
2020
|
|
2019
|
Cash and cash equivalents
|
$115.9
|
|
$89.0
|
Total assets
|
$6,737.5
|
|
$6,274.5
|
Working capital
|
$269.8
|
|
$52.8
|
Total debt
|
$1,793.2
|
|
$1,826.3
|
Stockholders’ equity
|
$3,824.8
|
|
$3,628.6
|
Ratio of debt to equity
|
0.47:1
|
|
|
0.50:1
|
|
Debt as a percentage of total capitalization
|
32
|
%
|
|
33
|
%
|
Working Capital
The increase in working capital at October 31, 2020 from the end of fiscal 2019 was primarily due to:
|
|
•
|
decrease in short-term debt of $154.4 million primarily due to repayment of the outstanding balance of the 2019 Term Loan at maturity net of the amount of borrowings received under the new 2020 Term Loan Agreement, entered into on October 16, 2020 (see below)
|
|
|
•
|
increase in inventories of $63.5 million due to lower sales from the impact of the COVID-19 pandemic and higher manufacturing costs
|
|
|
•
|
increase in cash and cash equivalents of $26.9 million
|
|
|
•
|
decrease in other current liabilities of $25.3 million primarily due to timing of payments and a reduction in fiscal 2020 customer rebate accruals due to the decrease in sales resulting from the COVID-19 pandemic
|
|
|
•
|
increase in prepaid expense and other current assets of $20.3 million, partially offset by;
|
|
|
•
|
increase in accounts payable of $25.9 million due to timing of payments
|
|
|
•
|
increase in employee compensation and benefits of $14.3 million
|
|
|
•
|
recognition of current operating lease liabilities of $33.3 million on adoption of ASC 842, Leases.
|
At October 31, 2020, our inventory months on hand were 6.6 compared to 6.4 at October 31, 2019. The $63.5 million increase in inventories was primarily due to lower sales from the impact of the COVID-19 pandemic and higher manufacturing costs.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our days sales outstanding (DSO) was 60 days at October 31, 2020 compared to 56 days at October 31, 2019. The increase in DSO from October 31, 2019 to October 31, 2020 was primarily due to timing of collections.
Operating Cash Flow
Cash provided by operating activities decreased by $226.6 million from $713.2 million in fiscal 2019 to $486.6 million in fiscal 2020. This decrease in cash flow provided by operating activities primarily consists of:
|
|
•
|
decrease in net income of $228.3 million from a net income of $466.7 million in fiscal 2019 to $238.4 million in fiscal 2020 which resulted from a decrease in our net sales and additional expenses due to the COVID-19 pandemic;
|
|
|
•
|
$80.9 million decrease in the net changes in prepayments and other assets primarily due to the refund of the prepayment made to the U.K. Tax Authorities in the prior year period and capitalized cloud computing costs;
|
|
|
•
|
$42.4 million decrease in the net changes in accrued liabilities partially due to reduction in indirect value-added tax, chargebacks and customer rebate accruals as a result of the decrease in sales;
|
|
|
•
|
$25.0 million decrease in the net changes in inventories primarily due to lower sales;
|
|
|
•
|
$20.0 million decrease in the net changes in operating lease liability and right-of-use asset due to impact from adoption of ASC 842, Leases;
|
|
|
•
|
$21.1 million decrease in the net changes in income tax payable, partially offset by;
|
|
|
•
|
$64.1 million increase in the net changes in trade receivables primarily due to timing of collections;
|
|
|
•
|
increase of $32.5 million in non-cash lease expense due to impact from adoption of ASC 842, Leases;
|
|
|
•
|
increase of $20.0 million driven by net changes in long term tax liabilities and defined benefit plan;
|
|
|
•
|
$19.6 million increase in the net changes in accounts payable primarily due to timing of payments;
|
|
|
•
|
decrease of $19.0 million due to a gain on sale of an intangible asset, representing the sale by CooperSurgical of the Filshie Clip exclusive distribution right recognized in prior year period;
|
|
|
•
|
increase of $16.7 million in impairment and loss on disposal of property, plant and equipment; and
|
|
|
•
|
$15.0 million increase in the net changes in deferred income taxes.
|
Investing Cash Flow
Cash used in investing activities increased by $13.2 million to $364.5 million in fiscal 2020 from $351.3 million in fiscal 2019 primarily due to:
|
|
•
|
increase of $18.3 million in capital expenditures, partially offset by;
|
|
|
•
|
decrease of $5.1 million in payments made for acquisitions in the fiscal 2020 compared to the prior year period.
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financing Cash Flow
Cash provided by financing activities decreased by $255.9 million to $95.5 million cash outflow in fiscal 2020 compared to $351.4 million cash outflow in fiscal 2019, primarily due to:
|
|
•
|
$2,068.6 million increase in proceeds from long-term debt, primarily due to funds received from the 2020 Credit Agreement (as defined below) partially offset by;
|
|
|
•
|
$1,374.1 million increase in repayments of long-term debt, primarily related to termination of 2019 Term Loan Agreement (as defined below), 2017 Term Loan Agreement (as defined below) and the 2016 Credit Agreement (as defined below); and
|
|
|
•
|
$531.9 million decrease in net proceeds from short-term debt, primarily due to movements in short term loans.
|
On April 1, 2020, the Company entered into a Revolving Credit and Term Loan Agreement (the 2020 Credit Agreement), among the Company and KeyBank National Association, as administrative agent. The 2020 Credit Agreement provides for (a) a multicurrency revolving credit facility (the 2020 Revolving Credit Facility) in an aggregate principal amount of $1.29 billion and (b) a term loan facility (the 2020 Term Loan Facility) in an aggregate principal amount of $850.0 million, each of which, unless terminated earlier, mature on April 1, 2025. In addition, the Company has the ability from time to time to request an increase to the size of the revolving credit facility or establish one or more new term loans under the term loan facility in an aggregate amount up to $1.605 billion, subject to the discretionary participation of the lenders.
On April 1, 2020, in connection with the Company’s entry into the 2020 Credit Agreement, the Company terminated the senior unsecured term loan agreement entered into on November 1, 2017 in connection with PARAGARD (the 2017 Term Loan Agreement) and the Revolving Credit and Term Loan Agreement entered into on March 1, 2016 (the 2016 Credit Agreement). In connection with the termination, all borrowings outstanding under the 2017 Term Loan Agreement and the 2016 Credit Agreement were repaid.
At maturity, on September 25, 2020, outstanding amounts under the 2019 Term Loan Agreement (including the Second Amendment to the 2018 Term Loan Agreement) were fully repaid using borrowings under the 2020 Revolving Credit Facility.
On October 16, 2020, the Company entered into a 364-day, $350.0 million, term loan agreement (the 2020 Term Loan Agreement) by and among the Company, the lenders party thereto and The Bank of Nova Scotia, as administrative agent which matures on October 15, 2021.
The following is a summary of the maximum commitments and the net amounts available to us under different credit facilities as of October 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Facility Limit
|
|
Outstanding Borrowings
|
|
Outstanding Letters of Credit
|
|
Total Amount Available
|
|
Maturity Date
|
2020 Revolving Credit Facility
|
|
$
|
1,290.0
|
|
|
$
|
534.0
|
|
|
$
|
1.4
|
|
|
$
|
754.6
|
|
|
April 1, 2025
|
2020 Term Loan Facility
|
|
850.0
|
|
|
850.0
|
|
|
n/a
|
|
|
—
|
|
|
April 1, 2025
|
2020 Term Loan
|
|
350.0
|
|
|
350.0
|
|
|
n/a
|
|
|
—
|
|
|
October 15, 2021
|
Total
|
|
$
|
2,490
|
|
|
$
|
1,734
|
|
|
$
|
1.4
|
|
|
$
|
754.6
|
|
|
|
The 2020 Credit Agreement and the 2019 Term Loan Agreement contain customary restrictive covenants, as well as financial covenants that require the Company to maintain a certain Total Leverage Ratio and
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest Coverage Ratio. As defined, in the 2020 Credit Agreement and the 2019 Term Loan Agreement, we are required to maintain an Interest Coverage Ratio of at least 3.00 to 1.00, and a Total Leverage Ratio of no higher than 3.75 to 1.00. At October 31, 2020, we were in compliance with the Interest Coverage Ratio at 21.19 to 1.00 and the Total Leverage Ratio at 2.15 to 1.00. The Company, after considering the potential impacts of the COVID-19 pandemic, expects to remain in compliance with its financial maintenance covenant and meet its debt service obligations for at least the twelve months following the date of issuance of these financial statements.
See Note 5. Debt of the Consolidated Financial Statements for additional information.
Considering recent market conditions and the ongoing COVID-19 pandemic crisis, we have re-evaluated our operating cash flows and cash requirements and continue to believe that current cash, cash equivalents, future cash flow from operating activities and cash available under our 2020 Credit Agreement will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures and contractual obligations for at least 12 months from the issuance date of the Consolidated Financial Statements included in this quarterly report. To the extent additional funds are necessary to meet our liquidity needs such as that for acquisitions, share repurchases, cash dividends or other activities as we execute our business strategy, we anticipate that additional funds will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all.
Share Repurchases
In December 2011, the Company's Board of Directors authorized the 2012 Share Repurchase Program and through subsequent amendments, the most recent in March 2017, the total repurchase authorization was increased from $500.0 million to $1.0 billion of the Company's common stock. The program has no expiration date and may be discontinued at any time. Purchases under the 2012 Share Repurchase Program are subject to a review of the circumstances in place at the time and may be made from time to time as permitted by securities laws and other legal requirements.
The Company's share repurchases during the fiscal year ended October 31, 2020 and 2019 as follows:
|
|
|
|
|
|
|
|
|
Years Ended October 31,
($ in millions)
|
2020
|
|
2019
|
Number of shares
|
160,850
|
|
|
536,972
|
|
Average repurchase price per share
|
$
|
296.9
|
|
|
$
|
292.7
|
|
Total costs of shares repurchased (in millions)
|
$
|
47.8
|
|
|
$
|
156.1
|
|
At October 31, 2020, $359.7 million remained authorized for repurchase under the program.
Dividends
In fiscal 2020 and 2019, the Company paid a semiannual dividend of 3 cents per share: $1.5 million or 3 cents per share on February 10, 2020 to stockholders of record on January 23, 2020; $1.5 million or 3 cents on August 7, 2020 to stockholders of record on July 23, 2020; $1.5 million or 3 cents per share on February 8, 2019 to stockholders of record on January 22, 2019; $1.5 million or 3 cents per share on August 7, 2019 to stockholders of record on July 23, 2019.
OFF BALANCE SHEET ARRANGEMENTS
None.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As of October 31, 2020, we had the following contractual obligations and commercial commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
(In millions)
|
Total
|
|
2021
|
|
2022
& 2023
|
|
2024
& 2025
|
|
2026
& Beyond
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
$
|
1,384.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,384.2
|
|
|
$
|
—
|
|
Interest payments
|
120.5
|
|
|
27.3
|
|
|
47.8
|
|
|
37.2
|
|
|
8.2
|
|
Operating leases
|
325.3
|
|
|
40.7
|
|
|
68.9
|
|
|
57.3
|
|
|
158.4
|
|
Transition tax on unremitted foreign earnings and profits (1)
|
124.0
|
|
|
11.8
|
|
|
23.6
|
|
|
51.7
|
|
|
36.9
|
|
Purchase obligation (2)
|
90.3
|
|
|
70.1
|
|
|
16.8
|
|
|
3.4
|
|
|
—
|
|
Defined benefit plan (3)
|
135.8
|
|
|
10.0
|
|
|
22.9
|
|
|
26.6
|
|
|
76.3
|
|
Total contractual obligations
|
2,180.1
|
|
|
159.9
|
|
|
180.0
|
|
|
1,560.4
|
|
|
279.8
|
|
Commercial commitments:
|
|
|
|
|
|
|
|
|
|
|
Stand-by letters of credit
|
4.5
|
|
|
4.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
2,184.6
|
|
|
$
|
164.4
|
|
|
$
|
180.0
|
|
|
$
|
1,560.4
|
|
|
$
|
279.8
|
|
(1) As of October 31, 2020, we had $124.0 million of income tax liabilities related to the one-time transition tax that resulted from the enactment of the 2017 Act, which is payable in six annual installments. The installment for 2021 is classified as a current income tax payable on our consolidated balance sheet.
We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, about $58.5 million of our long-term income taxes payable have been excluded from the table above. However, other long-term liabilities, included in our consolidated balance sheet, include a reserve for a portion of these uncertain tax positions. See Note 6. Income Taxes of the Consolidated Financial Statements for additional information.
(2) Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding and includes obligations for inventory, capital expenditures and other operating expense commitments.
(3) The expected future benefit payments for pension plans through 2030 are disclosed in Note 10. Employee Benefits of the Consolidated Financial Statements.
Inflation and Changing Prices
Inflation has had no appreciable effect on our operations in the last three fiscal years.
Summary of Non-GAAP Financial Measures
The non-GAAP financial measures that may be included in this MD&A and the reasons management believes they are useful to investors are described below. These measures should be considered supplemental in nature and are not intended to be a substitute for the related financial information prepared in accordance with GAAP. In addition, these measures may not be the same as similarly named measures presented by other companies.
Free cash flow is defined as cash provided by operating activities less capital expenditures. Management believes free cash flow is useful for investors as an additional measure of liquidity because it represents
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
cash that is available to grow the business, make strategic acquisitions, repay debt, buyback common stock or fund the dividend. We use free cash flow internally to understand, manage, make operating decisions and evaluate our business. In addition, we use free cash flow to help plan and forecast future periods.
Constant currency is defined as excluding the effect of foreign currency rate fluctuations. In order to assist with the assessment of how our underlying businesses performed, we compare the percentage change in net sales from one period to another, excluding the effect of foreign currency fluctuations. To present this information, current period revenue for entities reporting in currencies other than the United States dollar are converted into United States dollars at the average foreign exchange rates for the corresponding period in the prior year.
Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 1. Accounting Policies of the Consolidated Financial Statements.
Estimates and Critical Accounting Policies
Management estimates and judgments are an integral part of financial statements prepared in accordance with GAAP. We believe that the critical accounting policies described in this section address the more significant estimates required of management when preparing the Consolidated Financial Statements in accordance with GAAP. We consider an accounting estimate critical if changes in the estimate may have a material impact on our financial condition or results of operations. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustment to these balances in future periods.
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 and 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 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 impacted by uncertainty surrounding the COVID-19 pandemic and related economic disruptions. The extent to which the COVID-19 pandemic and related economic disruptions impact our accounting estimates 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; 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
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
|
|
|
•
|
carrying value of goodwill and other long-lived assets
|
There was not a material impact to the above estimates in our Consolidated Financial Statements for fiscal 2020 as a result of the COVID-19 pandemic. We continually monitor and evaluates the estimates used as additional information becomes available. Adjustments will be made to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. Our future assessment of the magnitude and duration of the COVID-19 pandemic, as well as other factors, could result in material changes to the estimates and material impacts to our Consolidated Financial Statements in future reporting periods.
Our critical accounting policies include:
|
|
•
|
Revenue recognition - We recognize revenue from product sales when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers and/or when services are rendered. Our payment terms are typically between 30 to 120 days. Provisions for certain rebates, sales incentives, volume discounts, contractual pricing allowances and product returns are accounted for as variable consideration and recorded as a reduction in sales.
|
Product discounts, including certain rebates, sales incentives, and volume discounts are granted based on terms of the arrangement with direct distribution customers and at times the indirect end consumer. We evaluate contractual terms, historical experience, and perform internal analysis to estimate total product discounts at the time revenue is recognized. Our PARAGARD program is subject to Medicaid rebates, which are estimated at the time of sale based upon the difference between current retail pricing and contractual Medicaid pricing and an estimate of the number of units that will be sold to Medicaid patients, which is informed by historical trends of claim history.
Sales returns are estimated and recorded based on historical sales return data. Promotional programs, such as cooperative advertising arrangements, are recorded in the same period as related sales. Reasonably likely changes to assumptions used to calculate the accruals for rebates, sales incentives, volume discounts, contractual pricing allowances and product returns are not anticipated to have a material effect on the financial statements. We currently disclose the impact of changes to assumptions in the quarterly or annual filing in which there is a material financial statement impact.
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•
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Valuation of goodwill - We evaluate 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. We account for goodwill, evaluate and test goodwill balances for impairment in accordance with related accounting standards. We performed an annual impairment assessment in our third quarter of fiscal 2020 and 2019, and our analysis indicated that we had no impairment of goodwill in our reporting units. We test goodwill impairment in accordance with ASU 2017-04, Intangibles - Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment. We perform a qualitative assessment to test each reporting unit's goodwill for impairment. Qualitative factors considered in this 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
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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.
|
|
•
|
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 it is reasonably certain that we 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.
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|
|
•
|
Business combinations - We routinely consummate business combinations. Results of operations for acquired companies are included in our consolidated results of operations from the date of acquisition. We recognize separately from goodwill, the identifiable assets acquired, including acquired in-process research and development, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date fair values as defined by accounting standards related to fair value measurements. Key assumptions routinely utilized in allocation of purchase price to intangible assets include projected financial information such as revenue projections for companies acquired. As of the acquisition date, goodwill is measured as the excess of consideration given, over the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are expensed as incurred.
|
|
|
•
|
Income taxes - We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
|
As part of the process of preparing our Consolidated Financial Statements, we must estimate our income tax expense for each of the jurisdictions in which we operate. This process requires significant management judgments and involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations as well as judging the recoverability of deferred tax assets. To the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction, a valuation allowance is established. Tax exposures can involve complex issues and may require an extended period to resolve. Frequent changes in tax laws in each jurisdiction complicate future estimates. To determine the tax rate, we use the full-year income and the related income tax
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
expense in each jurisdiction. We update the estimated effective tax rate for the effect of significant unusual items as they are identified. Changes in the geographic mix or estimated level of annual pre-tax income can affect the overall effective tax rate, and such changes could be material.
We file income tax returns in all jurisdictions in which we operate. We record a liability for uncertain tax positions taken or expected to be taken in income tax returns that we have determined are not more-likely-than-not realizable. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts. These tax reserves have been established based on management's assessment as to the potential exposure attributable to our uncertain tax positions as well as interest and penalties attributable to these uncertain tax positions. All tax reserves are analyzed quarterly and adjustments are made as events occur that result in changes in judgment.
Trademarks
Aquaform®, Avaira®, Avaira Vitality®, Biofinity®, Biofinity Energys®, MyDay®, MiSight®, ActivControl® and Proclear® are registered trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries. PC Technology™ and FIPS™ are trademarks of The Cooper Companies, Inc., its affiliates and/or subsidiaries. The clariti® mark is a registered trademark of The Cooper Companies, Inc., its affiliates and/or subsidiaries worldwide except in the United States where the use of clariti® is licensed. PARAGARD® is a registered trademark of CooperSurgical, Inc.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Cooper Companies, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Cooper Companies, Inc. and subsidiaries (the Company) as of October 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended October 31, 2020, and the related notes and financial statement Schedule II (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2020 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for Leases as of November 1, 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Unrecognized tax benefits
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company has recorded a liability for unrecognized tax benefits, excluding associated interest and penalties, of $58.5 million as of October 31, 2020. A reserve for unrecognized tax benefits is recorded when there is a greater than 50% likelihood that a position taken on the Company’s tax returns would not be sustained upon examination by the relevant taxing authority, based solely on the technical merits of the tax position.
We identified the assessment of unrecognized tax benefits as a critical audit matter. Evaluating the Company’s interpretation of tax law and its identification and estimate of uncertain tax positions, including transfer pricing related to its international operations, required complex auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
unrecognized tax benefit process, including controls related to the interpretation of tax law, identification of uncertain tax positions, and measurement of related liabilities. We involved tax and valuation professionals with specialized skills and knowledge, who assisted in:
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|
•
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evaluating the Company’s tax planning strategies and its interpretation and application of tax laws,
|
|
|
•
|
assessing transfer pricing studies for transactions between subsidiaries of the Company for compliance with applicable laws and regulations and evaluating the transfer prices based on observations for comparable companies that perform similar functions, and
|
|
|
•
|
inspecting correspondence and settlements from taxing authorities, and analyzing the expiration of statutes of limitations.
|
/s/ KPMG LLP
We have served as the Company’s auditor since 1982.
San Francisco, California
December 11, 2020
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions, except for earnings per share)
|
2020
|
|
2019
|
|
2018
|
Net sales
|
$
|
2,430.9
|
|
|
$
|
2,653.4
|
|
|
$
|
2,532.8
|
|
Cost of sales
|
896.1
|
|
|
896.6
|
|
|
900.5
|
|
Gross profit
|
1,534.8
|
|
|
1,756.8
|
|
|
1,632.3
|
|
Selling, general and administrative expense
|
992.5
|
|
|
996.2
|
|
|
973.3
|
|
Research and development expense
|
93.3
|
|
|
86.7
|
|
|
84.8
|
|
Amortization of intangibles
|
137.2
|
|
|
145.8
|
|
|
146.7
|
|
Impairment of intangibles
|
—
|
|
|
0.4
|
|
|
24.4
|
|
Gain on sale of an intangible (Note 4)
|
—
|
|
|
(19.0
|
)
|
|
—
|
|
Operating income
|
311.8
|
|
|
546.7
|
|
|
403.1
|
|
Interest expense
|
36.8
|
|
|
68.0
|
|
|
82.7
|
|
Other expense (income), net
|
8.5
|
|
|
1.3
|
|
|
(11.5
|
)
|
Income before income taxes
|
266.5
|
|
|
477.4
|
|
|
331.9
|
|
Provision for income taxes (Note 6)
|
28.1
|
|
|
10.7
|
|
|
192.0
|
|
Net income
|
238.4
|
|
|
466.7
|
|
|
139.9
|
|
Net income attributable to Cooper stockholders
|
$
|
238.4
|
|
|
$
|
466.7
|
|
|
$
|
139.9
|
|
Earnings per share (Note 7)
|
|
|
|
|
|
Basic
|
$
|
4.85
|
|
|
$
|
9.44
|
|
|
$
|
2.85
|
|
Diluted
|
$
|
4.81
|
|
|
$
|
9.33
|
|
|
$
|
2.81
|
|
Number of shares used to compute earnings per share:
|
|
|
|
—
|
|
|
—
|
|
Basic
|
49.1
|
|
|
49.4
|
|
|
49.1
|
|
Diluted
|
49.6
|
|
|
50.0
|
|
|
49.7
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Net income
|
$
|
238.4
|
|
|
$
|
466.7
|
|
|
$
|
139.9
|
|
Other comprehensive loss:
|
|
|
|
|
|
Cash flow hedges, net of tax (benefit) of $(4.1) in fiscal 2020
|
(13.0
|
)
|
|
—
|
|
|
—
|
|
Change in minimum pension liability, net of tax (benefit) provision of $(4.0), $(8.0) and $3.1, respectively
|
(12.8
|
)
|
|
(25.4
|
)
|
|
7.9
|
|
Foreign currency translation adjustment
|
0.9
|
|
|
9.0
|
|
|
(58.5
|
)
|
Other comprehensive loss
|
(24.9
|
)
|
|
(16.4
|
)
|
|
(50.6
|
)
|
Comprehensive income
|
$
|
213.5
|
|
|
$
|
450.3
|
|
|
$
|
89.3
|
|
Comprehensive income attributable to Cooper stockholders
|
$
|
213.5
|
|
|
$
|
450.3
|
|
|
$
|
89.3
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
October 31,
(In millions)
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
115.9
|
|
|
$
|
89.0
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $10.2 at October 31, 2020 and $16.4 at October 31, 2019
|
435.4
|
|
|
435.3
|
|
Inventories (Note 1)
|
570.4
|
|
|
506.9
|
|
Prepaid expense and other current assets
|
152.5
|
|
|
132.2
|
|
Total current assets
|
1,274.2
|
|
|
1,163.4
|
|
Property, plant and equipment, at cost (Note 1)
|
2,474.8
|
|
|
2,193.9
|
|
Less: accumulated depreciation and amortization
|
1,192.9
|
|
|
1,061.8
|
|
|
1,281.9
|
|
|
1,132.1
|
|
Operating lease right-of-use assets (Note 2)
|
260.2
|
|
|
—
|
|
Goodwill (Note 4)
|
2,447.3
|
|
|
2,428.9
|
|
Other intangibles, net (Note 4)
|
1,289.0
|
|
|
1,405.3
|
|
Deferred tax assets
|
80.1
|
|
|
78.0
|
|
Other assets
|
104.8
|
|
|
66.8
|
|
Total assets
|
$
|
6,737.5
|
|
|
$
|
6,274.5
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Short-term debt (Note 5)
|
$
|
409.3
|
|
|
$
|
563.7
|
|
Accounts payable
|
176.0
|
|
|
150.1
|
|
Employee compensation and benefits
|
119.0
|
|
|
104.7
|
|
Operating lease liabilities (Note 2)
|
33.3
|
|
|
—
|
|
Other current liabilities
|
266.8
|
|
|
292.1
|
|
Total current liabilities
|
1,004.4
|
|
|
1,110.6
|
|
Long-term debt (Note 5)
|
1,383.9
|
|
|
1,262.6
|
|
Deferred tax liabilities
|
25.8
|
|
|
28.0
|
|
Long-term tax payable
|
162.0
|
|
|
124.8
|
|
Operating lease liabilities (Note 2)
|
236.8
|
|
|
—
|
|
Accrued pension liability and other
|
99.8
|
|
|
119.9
|
|
Total liabilities
|
2,912.7
|
|
|
2,645.9
|
|
Contingencies (see Note 12)
|
|
|
|
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 October 31, 2020 and 53.2 at October 31, 2019
|
5.3
|
|
|
5.3
|
|
Additional paid-in capital
|
1,646.8
|
|
|
1,615.0
|
|
Accumulated other comprehensive loss
|
(472.0
|
)
|
|
(447.1
|
)
|
|
|
|
|
|
|
|
|
|
October 31,
(In millions)
|
2020
|
|
|
2019
|
|
Retained earnings
|
3,261.8
|
|
|
3,026.4
|
|
Treasury stock at cost: 4.3 shares at October 31, 2020 and 4.1 shares at October 31, 2019
|
(617.3
|
)
|
|
(571.2
|
)
|
Total Cooper stockholders' equity
|
3,824.6
|
|
|
3,628.4
|
|
Noncontrolling interests
|
0.2
|
|
|
0.2
|
|
Stockholders’ equity (Note 8)
|
3,824.8
|
|
|
3,628.6
|
|
Total liabilities and stockholders’ equity
|
$
|
6,737.5
|
|
|
$
|
6,274.5
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 October 31, 2017
|
48.8
|
|
|
$
|
4.9
|
|
|
3.6
|
|
|
$
|
0.3
|
|
|
$
|
1,526.7
|
|
|
$
|
(375.3
|
)
|
|
$
|
2,434.2
|
|
|
$
|
(415.1
|
)
|
|
$
|
0.1
|
|
|
$
|
3,175.8
|
|
Net income attributable to Cooper stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
139.9
|
|
|
—
|
|
|
—
|
|
|
139.9
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50.6
|
)
|
Issuance of common stock for stock plans, net
|
0.4
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.9
|
)
|
|
—
|
|
|
—
|
|
|
(2.9
|
)
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43.7
|
|
ASU2018-02 adoption
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4.8
|
)
|
|
4.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Balance at October 31, 2018
|
49.2
|
|
|
$
|
5.0
|
|
|
3.6
|
|
|
$
|
0.3
|
|
|
$
|
1,572.1
|
|
|
$
|
(430.7
|
)
|
|
$
|
2,576.0
|
|
|
$
|
(415.1
|
)
|
|
$
|
0.2
|
|
|
$
|
3,307.8
|
|
Net income attributable to Cooper stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
466.7
|
|
|
—
|
|
|
—
|
|
|
466.7
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16.4
|
)
|
Issuance of common stock for stock plans, net
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.8
|
|
Treasury stock repurchase
|
(0.5
|
)
|
|
(0.1
|
)
|
|
0.5
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(156.1
|
)
|
|
—
|
|
|
(156.1
|
)
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35.1
|
|
ASU2016-16 adoption
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13.3
|
)
|
|
—
|
|
|
—
|
|
|
(13.3
|
)
|
Balance at October 31, 2019
|
49.1
|
|
|
$
|
4.9
|
|
|
4.1
|
|
|
$
|
0.4
|
|
|
$
|
1,615.0
|
|
|
$
|
(447.1
|
)
|
|
$
|
3,026.4
|
|
|
$
|
(571.2
|
)
|
|
$
|
0.2
|
|
|
$
|
3,628.6
|
|
Net income attributable to Cooper stockholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
238.4
|
|
|
—
|
|
|
—
|
|
|
238.4
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24.9
|
)
|
Issuance of common stock for stock plans, net
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.8
|
)
|
Issuance of common stock for employee stock purchase plan
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
|
3.5
|
|
Treasury stock repurchase
|
(0.2
|
)
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47.8
|
)
|
|
—
|
|
|
(47.8
|
)
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36.8
|
|
Balance at October 31, 2020
|
49.1
|
|
|
$
|
4.9
|
|
|
4.3
|
|
|
$
|
0.4
|
|
|
$
|
1,646.8
|
|
|
$
|
(472.0
|
)
|
|
$
|
3,261.8
|
|
|
$
|
(617.3
|
)
|
|
$
|
0.2
|
|
|
$
|
3,824.8
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
238.4
|
|
|
$
|
466.7
|
|
|
$
|
139.9
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
287.1
|
|
|
280.8
|
|
|
275.1
|
|
Impairment of intangibles
|
—
|
|
|
0.4
|
|
|
24.4
|
|
Gain on sale of an intangible (Note 3)
|
—
|
|
|
(19.0
|
)
|
|
—
|
|
Share-based compensation expense
|
37.6
|
|
|
35.1
|
|
|
43.2
|
|
Inventory step-up release
|
—
|
|
|
0.1
|
|
|
50.5
|
|
Non-cash operating lease expense
|
32.5
|
|
|
—
|
|
|
—
|
|
Impairment and loss on disposal of property, plant and equipment
|
24.4
|
|
|
7.7
|
|
|
5.1
|
|
Deferred income taxes
|
(0.9
|
)
|
|
(15.9
|
)
|
|
2.9
|
|
Provision for doubtful accounts
|
(6.2
|
)
|
|
(2.6
|
)
|
|
8.2
|
|
CCA cost amortization
|
0.5
|
|
|
—
|
|
|
—
|
|
Interest income on convertible note
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
Change in assets and liabilities:
|
—
|
|
|
|
|
|
|
|
Accounts receivable
|
8.5
|
|
|
(55.6
|
)
|
|
(59.5
|
)
|
Inventories
|
(62.3
|
)
|
|
(37.3
|
)
|
|
(5.0
|
)
|
Other assets
|
(41.1
|
)
|
|
39.8
|
|
|
(64.9
|
)
|
Operating lease right-of-use assets and liabilities, net
|
(20.0
|
)
|
|
—
|
|
|
—
|
|
Accounts payable
|
23.2
|
|
|
3.6
|
|
|
2.9
|
|
Accrued liabilities
|
(9.3
|
)
|
|
33.1
|
|
|
81.2
|
|
Accrued income taxes
|
(12.4
|
)
|
|
8.7
|
|
|
4.4
|
|
Other long-term liabilities
|
(12.4
|
)
|
|
(32.4
|
)
|
|
160.5
|
|
Net cash provided by operating activities
|
486.6
|
|
|
713.2
|
|
|
668.9
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property, plant and equipment
|
(310.4
|
)
|
|
(292.1
|
)
|
|
(193.6
|
)
|
Acquisitions of businesses and assets, net of cash acquired, and other
|
(54.1
|
)
|
|
(59.2
|
)
|
|
(1,323.9
|
)
|
Net cash used in investing activities
|
(364.5
|
)
|
|
(351.3
|
)
|
|
(1,517.5
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from long-term debt
|
3,205.4
|
|
|
1,136.8
|
|
|
2,748.1
|
|
Repayments of long-term debt
|
(3,235.9
|
)
|
|
(1,861.8
|
)
|
|
(1,912.1
|
)
|
Net (repayments of) proceeds from short-term debt
|
(6.6
|
)
|
|
525.3
|
|
|
13.6
|
|
Repurchase of common stock
|
(47.8
|
)
|
|
(156.1
|
)
|
|
—
|
|
Proceeds related to share-based compensation awards
|
13.5
|
|
|
29.9
|
|
|
22.3
|
|
Payments related to share-based compensation awards
|
(20.3
|
)
|
|
(22.1
|
)
|
|
(20.5
|
)
|
Dividends on common stock
|
(3.0
|
)
|
|
(3.0
|
)
|
|
(2.9
|
)
|
Issuance of common stock for employee stock purchase plan
|
2.7
|
|
|
—
|
|
|
—
|
|
Debt acquisition costs
|
(5.6
|
)
|
|
(0.4
|
)
|
|
(3.9
|
)
|
Payment of contingent consideration
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
Proceeds from construction allowance
|
2.1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net cash (used in) provided by financing activities
|
(95.5
|
)
|
|
(351.4
|
)
|
|
844.4
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
0.7
|
|
|
(1.2
|
)
|
|
(4.4
|
)
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
27.3
|
|
|
9.3
|
|
|
(8.6
|
)
|
Cash, cash equivalents and restricted cash at beginning of year
|
89.5
|
|
|
80.2
|
|
|
88.8
|
|
Cash, cash equivalents and restricted cash at end of year
|
$
|
116.8
|
|
|
$
|
89.5
|
|
|
$
|
80.2
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
$
|
46.5
|
|
|
$
|
75.3
|
|
|
$
|
82.1
|
|
Income taxes
|
51.1
|
|
|
39.2
|
|
|
18.8
|
|
Reconciliation of cash flow information:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
115.9
|
|
|
$
|
89.0
|
|
|
$
|
77.7
|
|
Restricted cash included in other current assets
|
$
|
0.9
|
|
|
$
|
0.5
|
|
|
$
|
2.5
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
116.8
|
|
|
$
|
89.5
|
|
|
$
|
80.2
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Accounting Policies
General
The Cooper Companies, Inc. (Cooper, we or the Company) is a global medical device company publicly traded on the NYSE (NYSE:COO). Cooper operates through two business units, CooperVision and CooperSurgical.
|
|
•
|
CooperVision primarily develops, manufactures and markets a broad range of soft contact lenses for the worldwide vision correction market.
|
|
|
•
|
CooperSurgical primarily develops, manufactures, markets medical devices and procedures solutions, and provides services to improve health care delivery to women, babies and families.
|
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 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; 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.
|
There was not a material impact to the above estimates in the Company’s Consolidated Financial Statements for fiscal 2020. The Company continually monitors and evaluates the estimates used as additional information becomes available. Adjustments will be made to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. The Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material changes to the estimates and material impacts to the Company’s Consolidated Financial Statements in future reporting periods.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant Accounting Policies
Management's significant accounting policies include estimates and judgments which are an integral part of financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP). We believe that the accounting policies described in this section address the more significant policies utilized by management when preparing our consolidated financial statements in accordance with GAAP. We believe that the accounting policies and estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustment to these balances in future periods. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most important to aid in fully understanding and evaluating our reported financial results are:
Net Sales
The Company sells its products principally to a limited number of distributors, group purchasing organizations, eye care or health care professionals including independent practices, corporate retailers, hospitals and clinics or authorized resellers (collectively, its Customers). These Customers subsequently resell the Company’s products to eye care or health care providers and patients. In addition to product supply and distribution agreements with Customers, the Company enters into arrangements with health care providers and payors that provide for government-mandated and/or privately negotiated rebates, chargebacks and discounts with respect to the purchase of the Company’s products. The Company considers customer purchase orders, which in some cases are governed by master sales agreements, to be contracts with a customer. In situations where sales are to a distributor, the Company has concluded that its contracts are with the distributor. As part of its consideration of the contract, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). For each contract, the Company considers the promise to transfer products, each of which is distinct, to be the identified performance obligations.
Revenues from product sales are recognized when the Customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment or delivery to the Customer. When the Company performs shipping and handling activities after the transfer of control to the Customer (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues. The Company does not have any revenue recognized on payment expected to be received more than one year after the transfer of control of the products. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that the Company would have recognized is one year or less. See Note 13. Business Segment Information, for disaggregation of revenue.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from discounts, returns, chargebacks, rebates and other allowances that are offered within contracts between the Company and its Customers, health care providers, payors and other indirect customers relating to the Company’s sales of its products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified primarily in current liabilities. Variable consideration is estimated based on the most likely amount or expected value approach, depending on which method the Company expects to better predict the amount of consideration to which it will be entitled. Once the
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Company elects one of the methods to estimate variable consideration for a particular type of performance obligation, the Company applies that method consistently.
Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances
The Company generally provides Customers with discounts, which include incentive fees that are stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized. In addition, the Company receives sales order management, data and distribution services from certain Customers. To the extent the services received are distinct from the Company’s sale of products to the Customer and have readily determinable fair value, these payments are classified in selling, general and administrative expenses in our Consolidated Statements of Income.
Product Returns
Consistent with industry practice, the Company generally offers Customers a limited right of return for a product that has been purchased from the Company. The Company estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized. There is inherent judgment in estimating future refunds as they are susceptible to factors outside of our influence. However, we have significant experience in estimating the amount of refunds, based primarily on historical data. Our refund liability for product returns was $10.0 million and $11.6 million at October 31, 2020 and 2019, respectively, which is included in Accrued Liabilities on our Consolidated Balance Sheets and represents the expected value of the aggregate refunds that will be due to our customers.
Rebates and Chargebacks
Rebates are estimated based on contractual terms, historical experience, customer mix, trend analysis and projected market conditions in the various markets served.
Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list wholesale prices charged to the Company’s direct customers. For certain office and surgical products in CooperSurgical, customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by customers. CooperSurgical rebates are predominately related to the Medicaid rebate provision that is estimated based upon contractual terms, historical experience, and trend analysis.
Contract balances
The timing of billing and revenue recognition primarily occurs simultaneously. The Company does not have material contract assets or liabilities.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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•
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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.
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•
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Net realizable value of inventory - In assessing the value of inventories, we make estimates and judgments regarding aging of inventories and other relevant issues potentially affecting the saleable condition of products and estimated prices at which those products will sell. On an ongoing basis, we review the carrying value of our inventory, measuring number of months on hand and other indications of saleability. We reduce the value of inventory if there are indications that the carrying value is greater than net realizable value, resulting in a new, lower-cost basis for that inventory. Subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. While estimates are involved, historically, obsolescence has not been a significant factor due to long product dating and lengthy product life cycles.
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•
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Valuation of goodwill - We evaluate 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. We account for goodwill and evaluate our goodwill balances and test them for impairment in accordance with related accounting standards. We performed our annual impairment test in our third quarter of fiscal 2020 and 2019, and our analysis indicated that we had no impairment of goodwill in our reporting units.
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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.
We test goodwill impairment in accordance with ASU 2017-04, Intangibles - Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment. We perform a qualitative assessment to test each reporting unit's goodwill for impairment. Qualitative factors considered in this 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.
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•
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Business combinations - We routinely consummate business combinations. Results of operations for acquired companies are included in our consolidated results of operations from the date of acquisition. We recognize separately from goodwill, the identifiable assets acquired, including acquired in-process research and development, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date fair values as defined by accounting standards related to fair value measurements. Key assumptions routinely utilized in allocation of purchase price to intangible assets include projected financial information such as revenue projections for companies acquired. As of the
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THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
acquisition date, goodwill is measured as the excess of consideration given, over the net of the acquisition date fair values of the identifiable assets acquired and the liabilities assumed. Direct acquisition costs are expensed as incurred.
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•
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Income taxes - We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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As part of the process of preparing our consolidated financial statements, we must estimate our income tax expense for each of the jurisdictions in which we operate. This process requires significant management judgments and involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations as well as judging the recoverability of deferred tax assets. To the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction, a valuation allowance is established. Tax exposures can involve complex issues and may require an extended period to resolve. Frequent changes in tax laws in each jurisdiction complicate future estimates. To determine the tax rate, we use the full-year income and the related income tax expense in each jurisdiction. We update the estimated effective tax rate for the effect of significant unusual items as they are identified. Changes in the geographic mix or estimated level of annual pre-tax income can affect the overall effective tax rate, and such changes could be material.
We file income tax returns in all jurisdictions in which we operate. We record a liability for uncertain tax positions taken or expected to be taken in income tax returns that we have determined are not more-likely-than-not realizable. Our financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts. These tax reserves have been established based on management's assessment as to the potential exposure attributable to our uncertain tax positions as well as interest and penalties attributable to these uncertain tax positions. All tax reserves are analyzed quarterly and adjustments are made as events occur that result in changes in judgment.
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•
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Share-Based Compensation - We grant various share-based compensation awards, including stock options, performance unit shares, restricted stock and restricted stock units. Under fair value recognition provisions, share-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating Cooper's stock price volatility, employee exercise behaviors and related employee forfeiture rates.
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The expected life of the share-based awards is based on the observed and expected time to post-vesting forfeiture and/or exercise. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. In determining the expected volatility, management considers implied volatility from publicly-traded options on Cooper's common stock at the date of grant, historical volatility and other factors. The risk-free interest rate is based on the continuous rates provided by the United States Treasury with a term equal to the expected life of the award. The dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.
As share-based compensation expense recognized in our Consolidated Statements of Income is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
forfeitures. Forfeitures are estimated at the time of grant, based on historical experience, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
If factors change and we employ different assumptions in the application of the fair value recognition provisions, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period.
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, 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 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 October 31, 2020, the aggregate balances of lease right-of-use assets and lease liabilities were $260.2 million and $270.1 million, respectively. The standard did not affect our Consolidated Statements of Income and Comprehensive Income. 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
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. The Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses. We continue to monitor the economic implications of the COVID-19 pandemic, however based on current market conditions and as credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU will not have a material impact on the consolidated financial statements.
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 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 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 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 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 relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance generally can be applied from March 12, 2020 through December 31, 2022. We are currently assessing the impacts of the practical expedients provided in ASU 2020-04 and which, if any, we will adopt.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated 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 Financial Statements.
No other recently issued accounting pronouncements had or are expected to have a material impact on our Consolidated Financial Statements.
Consolidation
The financial statements in this report include the accounts of all of Cooper's consolidated entities. All significant intercompany transactions and balances are eliminated on consolidation.
Foreign Currency Translation
Most of our operations outside the United States use their local currency as their functional currency. We translate these assets and liabilities into United States dollars at year-end exchange rates. We translate income and expense accounts at average rates for each month. We record gains and losses from the translation of financial statements in foreign currencies into United States dollars in other comprehensive income. We record gains and losses from changes in exchange rates on transactions denominated in currencies other than each reporting location's functional currency in net income for each period. We recorded in other expense and income a net foreign exchange loss of $1.2 million for fiscal 2020, $2.2 million for fiscal 2019 and $3.4 million for fiscal 2018.
Litigation
We are subject to various legal proceedings, claims, litigation, investigations and contingencies arising out of the ordinary course of business. If we believe the likelihood of an adverse legal outcome is probable and the amount is estimable, we accrue a liability in accordance with accounting guidance for contingencies. We consult with legal counsel on matters related to litigation and seek input both within and outside the Company.
Long-lived Assets
We review long-lived assets held and used, intangible assets with finite useful lives and assets held for sale for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an evaluation of recoverability is required, the estimated undiscounted future cash flows associated with the asset group are compared to the asset group's carrying amount to determine if a write-down is required. If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded to the extent that the carrying amount exceeds the fair value. If management has committed to a plan to dispose of long-lived assets, the assets to be disposed of are reported at the lower of carrying amount or fair value less estimated costs to sell.
CooperVision provides optometric practices with in-office lenses used in marketing programs to facilitate efficient and convenient fitting of contact lenses by practitioners. Such lens fitting sets generally consist of a physical binder or rack to store contact lenses and an array of lenses. We record the costs associated with the original fitting set to other long-term assets on our Consolidated Balance Sheet. We amortize such costs over their estimated useful lives to selling, general and administrative expense on our Consolidated Statements of Income. We also expense the cost for lenses provided to practitioners as replenishment for fitting sets in the period shipped to selling, general and administrative expense on our Consolidated Statements of Income.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments purchased with maturities of three months or less to be cash equivalents. These investments are carried at cost, which approximates fair value.
Inventories
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|
|
|
|
|
|
|
|
October 31,
(In millions)
|
2020
|
|
2019
|
Raw materials
|
$
|
151.0
|
|
|
$
|
131.4
|
|
Work-in-process
|
12.4
|
|
|
13.3
|
|
Finished goods
|
407.0
|
|
|
362.2
|
|
|
$
|
570.4
|
|
|
$
|
506.9
|
|
Inventories are stated at the lower of cost or net realizable value. Cost is computed using standard cost that approximates actual cost, on a first-in, first-out basis.
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
October 31,
(In millions)
|
2020
|
|
2019
|
Land and improvements
|
$
|
19.9
|
|
|
$
|
19.9
|
|
Buildings and improvements
|
356.1
|
|
|
330.9
|
|
Machinery and equipment
|
1,764.9
|
|
|
1,582.3
|
|
Construction in progress
|
333.9
|
|
|
260.8
|
|
Property, plant and equipment, at cost
|
$
|
2,474.8
|
|
|
$
|
2,193.9
|
|
Less: Accumulated depreciation
|
1,192.9
|
|
|
1,061.8
|
|
|
$
|
1,281.9
|
|
|
$
|
1,132.1
|
|
Property, plant and equipment are stated at cost. We compute depreciation using the straight-line method in amounts sufficient to write off depreciable assets over their estimated useful lives. We amortize leasehold improvements over their estimated useful lives or the period of the related lease, whichever is shorter. We depreciate buildings over 30 to 40 years and machinery and equipment over 3 to 15 years.
We expense costs for maintenance and repairs and capitalize major replacements, renewals and betterments. We eliminate the cost and accumulated depreciation of depreciable assets retired or otherwise disposed of from the asset and accumulated depreciation accounts and reflect any gains or losses in operations for the period. We had capitalized interest included in construction in progress of $5.3 million and $6.1 million for the years ended October 31, 2020 and 2019, respectively.
Earnings Per Share
We determine basic earnings per share (EPS) by using the weighted average number of shares outstanding. We determine diluted EPS by increasing the weighted average number of shares outstanding in the denominator by the number of outstanding dilutive equity awards using the treasury stock method.
Treasury Stock
We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. At October 31, 2020 and 2019, the number of shares in treasury was approximately 4.3 million and 4.1 million, respectively. The Company purchased 161 thousand shares during the year ended
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2020 and 537 thousand shares during the year ended October 31, 2019. See Note 8. Stockholders' Equity for additional information on the share repurchase program.
Note 2. Leases
The Company primarily has operating leases for office, manufacturing and warehouse space, vehicles, and office equipment. The Company's 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, the Company uses its incremental borrowing rate based on the information available at the lease's commencement date in determining the present value of lease payments. The Company considers information including, but not limited to, the lease term, its 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 the Company will exercise the extension option.
The Company’s operating leases typically include non-lease components such as common-area maintenance costs. The Company has 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 the Consolidated 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 $2.4 million as of October 31, 2020 are not significant and are not included in the disclosure tables below.
The following table presents information about leases on the Consolidated Balance Sheet:
|
|
|
|
|
|
(In millions)
|
|
October 31, 2020
|
Operating Leases
|
|
|
Operating lease right-of-use assets
|
|
$
|
260.2
|
|
|
|
|
Operating lease liabilities, current
|
|
33.3
|
|
Operating lease liabilities, non-current
|
|
236.8
|
|
Total operating lease liabilities
|
|
$
|
270.1
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
11.3
|
|
Weighted average discount rate
|
|
3
|
%
|
The following table presents information about lease expense, which is included in selling, general and administrative expenses in the Consolidated Statement of Income and Comprehensive Income:
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
|
|
|
(In millions)
|
|
2020
|
Operating lease expense
|
|
$
|
41.2
|
|
Short-term lease expense
|
|
4.4
|
|
Variable lease expense
|
|
$
|
1.8
|
|
ASC 840 Comparative Disclosures
Prior to fiscal 2020, we accounted for our leases in accordance with ASC 840, Leases. Under ASC 840, rental expense for operating leases was $45.3 million and $38.8 million for fiscal 2019 and 2018, respectively.
Supplemental Cash Flow Information
The following table presents supplemental cash flow information about the Company’s leases:
|
|
|
|
|
|
(In millions)
|
|
2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
40.6
|
|
Operating lease right-of-use assets obtained in exchange for lease obligations
|
|
17.7
|
|
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 October 31, 2020 are:
|
|
|
|
|
|
(In millions)
|
|
|
2021
|
|
$
|
40.7
|
|
2022
|
|
36.3
|
|
2023
|
|
32.6
|
|
2024
|
|
29.3
|
|
2025
|
|
28.0
|
|
Thereafter
|
|
158.4
|
|
Total lease payments
|
|
325.3
|
|
Less: interest
|
|
55.2
|
|
Present value of lease liabilities
|
|
$
|
270.1
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Customer relationships
|
$
|
11.4
|
|
|
$
|
7.5
|
|
|
$
|
23.5
|
|
Trademarks
|
5.1
|
|
|
10.2
|
|
|
100.0
|
|
Technology
|
—
|
|
|
12.3
|
|
|
—
|
|
Composite intangible asset
|
—
|
|
|
—
|
|
|
1,061.9
|
|
Other
|
3.9
|
|
|
0.1
|
|
|
4.2
|
|
Total identifiable intangible assets
|
$
|
20.4
|
|
|
$
|
30.1
|
|
|
$
|
1,189.6
|
|
Goodwill
|
15.3
|
|
|
29.8
|
|
|
70.6
|
|
Net tangible (liabilities) assets
|
(0.3
|
)
|
|
7.3
|
|
|
59.6
|
|
Total purchase price
|
$
|
35.4
|
|
|
$
|
67.2
|
|
|
$
|
1,319.8
|
|
All acquisitions were funded by cash generated from operations or facility borrowings.
For business acquisitions, the Company recorded tangible and intangible assets acquired and liabilities assumed at their fair values as of the applicable date of acquisition. For asset acquisitions, the Company recorded tangible and intangible assets acquired and liabilities assumed at their estimated and relative fair values as of the applicable date of acquisition.
The Company believes these acquisitions strengthen CooperSurgical's and CooperVision's businesses through the addition of new distributors or complementary products and services.
Fiscal Year 2020
On August 7, 2020, CooperVision completed the acquisition of a privately-held U.S contact lens manufacturer focusing on ortho-k lenses. This acquisition expands CooperVision’s specialty eye care portfolio and its leadership in addressing the increasing severity and prevalence of myopia. The purchase price allocation is preliminary and the Company is in the process of finalizing information and the corresponding impact on goodwill.
On December 13, 2019, CooperSurgical completed the acquisition of a privately-held distributor of in vitro fertilization (IVF) medical devices and systems.
The pro forma results of operations have not been presented because the effect of the business combinations described above were not material to our consolidated results of operations.
Fiscal Year 2019
Purchase price allocation for the acquisitions in fiscal year 2019 are completed.
On December 31, 2018, CooperSurgical completed the acquisition of a privately-held U.S. medical device company that develops mechanical surgical solutions for skin closure.
On December 28, 2018, CooperVision completed the acquisition of a privately-held scleral lens company, which expands CooperVision's specialty and scleral lens portfolio.
The pro forma results of operations of these acquisitions have not been presented because the effects of the business combinations described above, individually and in the aggregate, were not material to the reported consolidated financial results.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fiscal Year 2018
PARAGARD
On November 1, 2017, CooperSurgical acquired the assets of the PARAGARD Intrauterine Device (IUD) business (PARAGARD) from Teva Pharmaceuticals Industries Limited for $1.1 billion.
This asset acquisition broadened and strengthened CooperSurgical's product portfolio. PARAGARD® is the only hormone-free, long lasting, reversible contraceptive approved by the United States Food and Drug Administration (FDA) available in the United States.
The Company has accounted for the acquisition of PARAGARD as a purchase of assets in accordance with ASC Topic 805, Business Combinations, and ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, whereby the Company recognized assets acquired based on their estimated relative fair values on the acquisition date. Due to the required screening test, the acquisition does not meet the definition of a business as substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset. The Company retained independent appraisers to advise management in the determination of the relative fair value of the various assets acquired and liabilities assumed. The values assigned in these financial statements represent management’s best estimate of relative fair values as of the acquisition date.
The following table summarizes the relative fair values of net assets acquired and liabilities assumed using the cost accumulation and allocation model:
|
|
|
|
|
(In millions)
|
Relative Fair Value
|
Composite intangible asset (1)
|
$
|
1,061.9
|
|
Assembled workforce intangible asset (2)
|
1.2
|
|
Property, plant and equipment
|
2.0
|
|
Inventory (3)
|
47.3
|
|
Other assets
|
9.4
|
|
Total assets acquired
|
$
|
1,121.8
|
|
Less: liabilities assumed
|
16.4
|
|
Total Purchase Price
|
$
|
1,105.4
|
|
The Company proportionally allocated the acquisition costs to the net assets acquired. The acquisition-related costs included advisory, legal, valuation and other professional fees.
(1) Composite Intangible asset consists of technology, trade name, New Drug Application (NDA) approval and physician relationships, which have been valued as a single composite intangible asset as they are inextricably linked. The composite asset was identified as the primary asset acquired, was valued using the Multi-Period Excess Earnings Method and will be amortized over 15 years.
(2) An assembled workforce was recognized as a separate acquired intangible asset, given the purchase of assets and will be amortized over 5 years.
(3) Inventory relative fair value includes step up of $45.4 million.
As PARAGARD was considered an asset purchase as opposed to a business acquisition in accordance with the guidance under ASC 805, Business Combinations, and ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, the Company has not included proforma financial information which is applicable for a business acquisition.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other Acquisitions
On April 3, 2018, CooperSurgical completed the acquisition of a privately held company that specializes primarily in in-vitro fertilization (IVF) media. This acquisition product categories include media products as well as IVF laboratory air filtration products and dishware.
On January 4, 2018, CooperVision acquired a long-standing distribution partner, with a leading position in the distribution of contact lenses to the Optical and Pharmacy sector in Israel.
On December 1, 2017, CooperVision acquired a leading provider of orthokeratology (ortho-k) specialty contact lenses and oxygen permeable rigid contact lens materials. ortho-k contact lenses are overnight lenses which enable corneal topography correction for myopia (nearsightedness) patients.
Note 4. Intangible Assets
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
CooperVision
|
|
CooperSurgical
|
|
Total
|
Balance at October 31, 2018
|
$
|
1,742.9
|
|
|
$
|
649.2
|
|
|
$
|
2,392.1
|
|
Net additions
|
14.1
|
|
|
22.0
|
|
|
36.1
|
|
Foreign currency translation adjustment
|
8.4
|
|
|
(7.7
|
)
|
|
0.7
|
|
Balance at October 31, 2019
|
$
|
1,765.4
|
|
|
$
|
663.5
|
|
|
$
|
2,428.9
|
|
Net additions
|
13.5
|
|
|
1.8
|
|
|
15.3
|
|
Foreign currency translation adjustment
|
0.4
|
|
|
2.7
|
|
|
3.1
|
|
Balance at October 31, 2020
|
$
|
1,779.3
|
|
|
$
|
668.0
|
|
|
$
|
2,447.3
|
|
Of the October 31, 2020 goodwill balance, $134.2 million for CooperSurgical and $26.9 million for CooperVision is expected to be deductible for tax purposes. Of the October 31, 2019 goodwill balance, $146.8 million for CooperSurgical and $29.2 million for CooperVision was expected to be deductible for tax purposes.
The Company evaluates goodwill annually during the fiscal third quarter and whenever 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 its annual impairment assessment in the third quarter of each of fiscal 2020 and 2019, which indicated that there was no impairment of goodwill in reporting units at either time. 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, which reflects 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.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 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
|
$
|
153.4
|
|
|
$
|
37.7
|
|
|
$
|
148.5
|
|
|
$
|
27.3
|
|
|
14
|
Composite intangible asset
|
1,061.9
|
|
|
212.4
|
|
|
1,061.9
|
|
|
141.6
|
|
|
15
|
Technology
|
401.2
|
|
|
251.9
|
|
|
399.9
|
|
|
221.2
|
|
|
11
|
Customer relationships
|
367.0
|
|
|
216.2
|
|
|
357.6
|
|
|
194.0
|
|
|
13
|
License and distribution rights and other
|
31.8
|
|
|
18.2
|
|
|
27.9
|
|
|
15.3
|
|
|
10
|
|
2,015.3
|
|
|
$
|
736.4
|
|
|
1,995.8
|
|
|
$
|
599.4
|
|
|
14
|
Less: accumulated amortization and translation
|
736.4
|
|
|
|
|
599.4
|
|
|
|
|
|
Intangible assets with definite lives, net
|
$
|
1,278.9
|
|
|
|
|
$
|
1,396.4
|
|
|
|
|
|
Intangible assets with indefinite lives, net (1)
|
10.1
|
|
|
|
|
8.9
|
|
|
|
|
|
Total other intangible assets, net
|
$
|
1,289.0
|
|
|
|
|
$
|
1,405.3
|
|
|
|
|
|
(1) Intangible assets with indefinite lives include technology and trademarks.
Balances include foreign currency translation adjustments.
In the second quarter of fiscal 2019, CooperSurgical sold an exclusive distribution right to distribute Filshie Clip System in the U.S. for $21.0 million and recognized a gain of $19.0 million.
As of October 31, 2020, the estimation of amortization expenses for intangible assets with definite lives is as follows:
|
|
|
|
|
Fiscal years:
|
(In millions)
|
2021
|
$
|
136.4
|
|
2022
|
134.5
|
|
2023
|
132.3
|
|
2024
|
128.1
|
|
Thereafter
|
747.6
|
|
Total remaining amortization for intangible assets with definite lives
|
$
|
1,278.9
|
|
The Company assesses definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of a definite-lived intangible asset (asset group) may not be recoverable. When events or changes in circumstances indicate that the carrying amount of a definite-lived intangible asset may not be recoverable, the Company evaluates whether the definite-lived intangible asset is impaired by comparing its carrying value to its undiscounted future cash flows. The Company assesses indefinite-lived intangible assets annually in the third quarter of the fiscal year, or whenever events or circumstances indicate that the carrying amount of an indefinite-lived intangible asset (asset group) may not be recoverable. The Company evaluates whether the indefinite-lived intangible asset is impaired by comparing its carrying value to its fair value.
If the carrying value of a definite-lived or indefinite-lived intangible asset is not recoverable, an impairment loss is recognized based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. The Company performs impairment tests using an
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
income approach, more specifically a relief from royalty method. In the development of the forecasted cash flows, the Company applies significant management judgment to determine key assumptions, including revenue growth and operating margin growth, royalty rates and discount rates assumptions. Revenue and operating margin growth assumptions are based on historical trends and management’s expectations for future growth. Royalty rates used are consistent with those assumed for the original purchase accounting valuation. The discount rates were based on a weighted-average cost of capital utilizing industry market data of similar companies, in addition to estimated returns on the assets utilized in the operations of the applicable reporting unit, including net working capital, fixed assets and intangible assets. Other assumptions are consistent with those applied to goodwill impairment testing.
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 during fiscal 2020.
Note 5. Debt
|
|
|
|
|
|
|
|
|
October 31,
(In millions)
|
2020
|
|
2019
|
Overdraft and other credit facilities
|
$
|
59.4
|
|
|
$
|
63.7
|
|
Term loans
|
350.0
|
|
|
500.0
|
|
Less: unamortized debt issuance cost
|
(0.1
|
)
|
|
—
|
|
Short-term debt
|
$
|
409.3
|
|
|
$
|
563.7
|
|
|
|
|
|
Revolving credit
|
$
|
534.0
|
|
|
$
|
264.0
|
|
Term loans
|
850.0
|
|
|
1,000.0
|
|
Other
|
0.2
|
|
|
0.2
|
|
Less: unamortized debt issuance cost
|
(0.3
|
)
|
|
(1.6
|
)
|
Long-term debt
|
$
|
1,383.9
|
|
|
$
|
1,262.6
|
|
Total debt
|
$
|
1,793.2
|
|
|
$
|
1,826.3
|
|
Fiscal year maturities of long-term debt as of October 31, 2020, are as follows:
|
|
|
|
|
Year
(In millions)
|
|
2021
|
$
|
—
|
|
2022
|
$
|
—
|
|
2023
|
$
|
—
|
|
2024
|
$
|
—
|
|
2025
|
$
|
1,384.2
|
|
Thereafter
|
$
|
—
|
|
Term Loan Agreement on October 16, 2020
On October 16, 2020, the Company entered into a 364-day, $350.0 million, term loan agreement by and among the Company, the lenders party thereto and The Bank of Nova Scotia, as administrative agent which matures on October 15, 2021. The funds were used to partially repay outstanding borrowings under the 2020 Revolving Credit Facility (as defined below). At October 31, 2020, the Company had $350.0 million outstanding under this agreement.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Amounts outstanding under this agreement will bear interest, at the Company's option, at either the base rate, or the adjusted LIBO rate, plus, in each case, an applicable rate of 0.00% in respect of base rate loans and 0.80% in respect of adjusted LIBO rate loans. The interest rate was 0.93% at October 31, 2020.
This agreement contains customary restrictive covenants, as well as financial covenants that require the Company to maintain a certain Total Leverage Ratio and Interest Coverage Ratio consistent with the 2020 Credit Agreement discussed below.
Revolving Credit and Term Loan Agreement on April 1, 2020
On April 1, 2020, the Company entered into a Revolving Credit and Term Loan Agreement (the 2020 Credit Agreement), among the Company, CooperVision International Holding Company, LP, CooperSurgical Netherlands B.V., CooperVision Holding Kft. the lenders from time to time party thereto, and KeyBank National Association, as administrative agent. The 2020 Credit Agreement provides for (a) a multicurrency revolving credit facility (the 2020 Revolving Credit Facility) in an aggregate principal amount of $1.29 billion and (b) a term loan facility (the 2020 Term Loan Facility) in an aggregate principal amount of $850.0 million, each of which, unless terminated earlier, mature on April 1, 2025. In addition, the Company has the ability from time to time to request an increase to the size of the revolving credit facility or establish one or more new term loans under the term loan facility in an aggregate amount up to $1.605 billion, subject to the discretionary participation of the lenders.
Amounts outstanding under the 2020 Credit Agreement will bear interest, at the Company’s option, at either the base rate, or the adjusted LIBO rate or adjusted foreign currency rate, plus, in each case, an applicable rate of between 0.00% and 0.50% in respect of base rate loans, and between 0.75% and 1.50% in respect of adjusted LIBO rate or adjusted foreign currency rate loans, in each case in accordance with a pricing grid tied to the Total Leverage Ratio, as defined in the 2020 Credit Agreement. During the term of the 2020 Revolving Credit Facility, the Borrowers may borrow, repay and re-borrow amounts available under the Revolving Credit Facility, subject to voluntary reduction of the revolving commitment.
The Company pays an annual commitment fee that ranges from 0.10% to 0.20% of the unused portion of the 2020 Revolving Credit Facility based upon the Company’s Total Leverage Ratio, as defined in the 2020 Credit Agreement. In addition to the annual commitment fee, the Company is also required to pay certain letter of credit and related fronting fees and other administrative fees pursuant to the terms of the 2020 Credit Agreement.
On April 1, 2020, the Company borrowed $850.0 million under the 2020 Term Loan Facility and $445.0 million under the 2020 Revolving Credit Facility and used the proceeds to fully repay all borrowings outstanding under a previously existing term loan agreement and transfer all letters of credit and borrowings outstanding under a previously existing credit agreement to the 2020 Credit Agreement, as further described below.
On October 30, 2020, the Company entered into Amendment No. 1 to the 2020 Credit Agreement (the First Amendment to the 2020 Credit Agreement). The First Amendment to the 2020 Credit Agreement modifies the 2020 Credit Agreement by, among other things, adding CooperVision International Limited as a revolving borrower and releasing certain borrowers in the 2020 Credit Agreement.
At October 31, 2020, the Company had $850.0 million outstanding under the 2020 Term Loan Facility and $534.0 million outstanding under the 2020 Revolving Credit Facility. The interest rate on the 2020 Term Loan Facility was 1.15% at October 31, 2020. The interest rate on the 2020 Revolving Credit Facility was 1.15% at October 31, 2020. In fiscal 2020, the Company expensed $1.8 million, related to the debt issuance costs of the 2020 Term Loan Facility.
The 2020 Credit Agreement contains customary restrictive covenants, as well as financial covenants that require the Company to maintain a certain Total Leverage Ratio and Interest Coverage Ratio, each as defined in the 2020 Credit Agreement:
|
|
•
|
Interest Coverage Ratio, as defined, to be at least 3.00 to 1.00 at all times.
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
•
|
Total Leverage Ratio, as defined, to be no higher than 3.75 to 1.00.
|
At October 31, 2020, the Company was in compliance with the Interest Coverage Ratio at 21.19 to 1.00 and the Total Leverage Ratio at 2.15 to 1.00 for 2020 Credit Agreement. The Company, after considering the potential impacts of the COVID-19 pandemic, expects to remain in compliance with its financial maintenance covenant and meet its debt service obligations for at least the twelve months following the date of issuance of these financial statements.
$500 million Term Loan on September 27, 2019, amended on April 1, 2020
On November 1, 2018, the Company entered into a 364-day senior unsecured term loan agreement (the 2018 Term Loan Agreement) by and among the Company, the lenders party thereto and PNC Bank, National Association, as administrative agent which was scheduled to mature on October 31, 2019. On September 27, 2019, the Company amended the 2018 Term Loan Agreement to establish a new 364-day senior unsecured term loan (the 2019 Term Loan Agreement) with the same parties as the 2018 Term Loan Agreement. The 2019 Term Loan Agreement modifies certain provisions of the 2018 Term Loan Agreement which, among other things, extended the maturity date to September 25, 2020 and increased the aggregate principal amount of the term loan facility from an original amount of $400 million to $500 million. The Company used the additional funds to partially repay outstanding borrowings.
On April 1, 2020, the Company entered into Amendment No. 2 to the 2018 Term Loan Agreement (the Second Amendment to the 2018 Term Loan Agreement). The Second Amendment to the 2018 Term Loan Agreement further modifies the 2018 Term Loan Agreement by, among other things, conforming certain provisions therein to those contained in the 2020 Credit Agreement discussed above.
At maturity, on September 25, 2020, outstanding amounts under the 2019 Term Loan Agreement (including the Second Amendment to the 2018 Term Loan Agreement) were fully repaid using borrowings under the 2020 Revolving Credit Facility.
The following is a summary of the maximum commitments and the net amounts available to the Company under the credit facilities discussed above as of October 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Facility Limit
|
|
Outstanding Borrowings
|
|
Outstanding Letters of Credit
|
|
Total Amount Available
|
|
Maturity Date
|
2020 Revolving Credit Facility
|
|
$
|
1,290.0
|
|
|
$
|
534.0
|
|
|
$
|
1.4
|
|
|
$
|
754.6
|
|
|
April 1, 2025
|
2020 Term Loan Facility
|
|
850.0
|
|
|
850.0
|
|
|
n/a
|
|
|
—
|
|
|
April 1, 2025
|
2020 Term Loan
|
|
350.0
|
|
|
350.0
|
|
|
n/a
|
|
|
—
|
|
|
October 15, 2021
|
Total
|
|
$
|
2,490.0
|
|
|
$
|
1,734.0
|
|
|
$
|
1.4
|
|
|
$
|
754.6
|
|
|
|
European Credit Facilities
The Company maintains European credit facilities in the form of continuing and unconditional guarantees. The aggregate facility limit was $25.8 million and $34.6 million at October 31, 2020 and 2019, respectively. The Company will pay all forms of indebtedness in the currency in which it is denominated for those certain subsidiaries. Interest expense is calculated on all outstanding balances based on an applicable base rate for each country plus a fixed spread common across most subsidiaries covered under the guaranty. At October 31, 2020, $0.7 million of the facilities were utilized. The weighted average interest rate on the outstanding balances was 1.59%.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Asian Pacific Credit Facilities
The Company maintains Yen-denominated credit facilities in Japan supported by continuing and unconditional guarantees. The aggregate facility limit was $76.6 million and $69.3 million at October 31, 2020 and 2019, respectively. The Company will pay all forms of indebtedness in Yen upon demand. Interest expense is calculated on the outstanding balance based on the base rate or TIBOR plus a fixed spread. At October 31, 2020, $57.7 million of the combined facilities were utilized. The weighted average interest rate on the outstanding balances was 0.43%.
The Company maintains credit facilities for certain of our Asia Pacific subsidiaries. Each facility is supported by a continuing and unconditional guaranty. The aggregate facility limit was $11.2 million and $10.8 million at October 31, 2020 and 2019, respectively. The Company will pay all forms of indebtedness, for each facility, in the currency in which it is denominated for those certain subsidiaries. Interest expense is calculated on all outstanding balances based on an applicable base rate for each country plus a fixed spread across all subsidiaries covered under each guaranty. At October 31, 2020, $0.4 million of the facilities were utilized. The weighted average interest rate on the outstanding balances was 2.41%.
Letters of Credit
The Company maintain letters of credit throughout the world with various financial institutions that primarily serve as guarantee notes on certain debt obligations. The aggregate outstanding amount of letters of credit at October 31, 2020 and October 31, 2019 was $4.5 million and $4.8 million, respectively.
Note 6. Income Taxes
Recent Tax Legislation
Coronavirus Aid, Relief and Economic Security Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted and signed into law in response to the market volatility and instability resulting from the COVID-19 pandemic. It includes a significant number of tax provisions and lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (the 2017 Act). The changes are mainly related to: (1) the business interest expense disallowance rules for 2019 and 2020; (2) net operating loss rules; (3) charitable contribution limitations; (4) employee retention credit; and (5) the realization of corporate alternative minimum tax credits.
The Company continues to assess the impact and future implications of these provisions; however, it does not anticipate any amounts that could give rise to a material impact to the overall Consolidated Financial Statements.
Effective Tax Rate
The Company’s effective tax rate (ETR) was 10.6% and 2.3% for fiscal 2020 and fiscal 2019, respectively. The ETR in fiscal 2020 increased in comparison to fiscal 2019 primarily due to foreign earnings subject to US tax, partially offset by a shift in the geographic mix of income.
The ETR for both fiscal 2020 and fiscal 2019 was less than the US federal statutory tax rate primarily due to foreign earnings in jurisdictions with lower tax rates, a step-up of the US tax-deductible basis of intellectual property rights from intra-entity sales and excess tax benefits from share-based compensation. This was partially offset by foreign earnings subject to US tax. The jurisdictions with lower tax rates with the most significant tax impact include Barbados, Puerto Rico and the United Kingdom.
The ETR for fiscal 2018 was greater than the US federal statutory tax rate primarily due to enactment of the 2017 Tax Act. This was partially offset by foreign earnings in jurisdictions with lower tax rates and
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
excess tax benefits from share-based compensation. The jurisdictions with lower tax rates with the most significant tax impact include Barbados, Puerto Rico and the United Kingdom.
The components of income before income taxes and the income tax provision related to income from all operations in our Consolidated Statements of Income consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Income before income taxes:
|
|
|
|
|
|
United States
|
$
|
(88.0
|
)
|
|
$
|
(32.8
|
)
|
|
$
|
(122.8
|
)
|
Foreign
|
354.5
|
|
|
510.2
|
|
|
454.7
|
|
|
$
|
266.5
|
|
|
$
|
477.4
|
|
|
$
|
331.9
|
|
Income tax provision
|
$
|
28.1
|
|
|
$
|
10.7
|
|
|
$
|
192.0
|
|
The income tax provision (benefit) related to income in our Consolidated Statements of Income consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal
|
$
|
1.4
|
|
|
$
|
9.2
|
|
|
$
|
165.6
|
|
State
|
1.1
|
|
|
1.6
|
|
|
0.5
|
|
Foreign
|
26.5
|
|
|
15.8
|
|
|
23.0
|
|
|
29.0
|
|
|
26.6
|
|
|
189.1
|
|
Deferred:
|
|
|
|
|
|
Federal
|
3.2
|
|
|
(8.1
|
)
|
|
16.1
|
|
State
|
0.8
|
|
|
(0.9
|
)
|
|
1.0
|
|
Foreign
|
(4.9
|
)
|
|
(6.9
|
)
|
|
(14.2
|
)
|
|
(0.9
|
)
|
|
(15.9
|
)
|
|
2.9
|
|
Income tax provision
|
$
|
28.1
|
|
|
$
|
10.7
|
|
|
$
|
192.0
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
We reconcile the provision for income taxes attributable to income from operations and the amount computed by applying the statutory federal income tax rate of 21% for fiscal 2020 and 2019, and 23% for fiscal 2018, to income before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Computed expected provision for taxes
|
$
|
56.0
|
|
|
$
|
100.3
|
|
|
$
|
77.5
|
|
(Decrease) increase in taxes resulting from:
|
|
|
|
|
|
Income earned outside the United States subject to different tax rates
|
(54.7
|
)
|
|
(85.6
|
)
|
|
(97.5
|
)
|
State taxes, net of federal income tax benefit
|
1.9
|
|
|
0.4
|
|
|
(4.9
|
)
|
Foreign source income subject to United States tax
|
32.0
|
|
|
16.1
|
|
|
—
|
|
U.S. tax reform
|
—
|
|
|
(5.8
|
)
|
|
214.6
|
|
Incentive stock option compensation and non-deductible employee compensation
|
(4.4
|
)
|
|
(7.8
|
)
|
|
(11.1
|
)
|
Deferred tax asset step-up
|
(9.0
|
)
|
|
(6.7
|
)
|
|
(1.9
|
)
|
US provision-to-return
|
7.0
|
|
|
4.4
|
|
|
(0.7
|
)
|
Tax accrual adjustment
|
(0.1
|
)
|
|
(1.5
|
)
|
|
13.9
|
|
Other, net
|
(0.6
|
)
|
|
(3.1
|
)
|
|
2.1
|
|
Actual provision for income taxes
|
$
|
28.1
|
|
|
$
|
10.7
|
|
|
$
|
192.0
|
|
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are:
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Accounts receivable, principally due to allowances for doubtful accounts
|
$
|
2.6
|
|
|
$
|
3.6
|
|
Inventories
|
5.8
|
|
|
3.5
|
|
Litigation settlements
|
0.2
|
|
|
0.1
|
|
Accrued liabilities, reserves and compensation accruals
|
76.9
|
|
|
55.1
|
|
Foreign deferred tax assets
|
90.9
|
|
|
52.5
|
|
Restricted stock and stock option expenses
|
21.4
|
|
|
26.1
|
|
Net operating loss carryforwards
|
9.6
|
|
|
8.3
|
|
Intangible assets
|
19.6
|
|
|
11.1
|
|
Research and experimental expenses - Section 59(e)
|
9.2
|
|
|
2.5
|
|
Tax credit carryforwards
|
1.5
|
|
|
1.3
|
|
Total gross deferred tax assets
|
237.7
|
|
|
164.1
|
|
Less: valuation allowance
|
(45.3
|
)
|
|
(41.5
|
)
|
Deferred tax assets
|
192.4
|
|
|
122.6
|
|
Deferred tax liabilities:
|
|
|
|
Tax deductible goodwill
|
(29.7
|
)
|
|
(25.0
|
)
|
Plant and equipment
|
(39.2
|
)
|
|
(14.3
|
)
|
Deferred tax on foreign earnings
|
(7.5
|
)
|
|
(5.9
|
)
|
Transaction costs
|
(0.7
|
)
|
|
(0.7
|
)
|
Foreign deferred tax liabilities
|
(61.0
|
)
|
|
(27.6
|
)
|
Total gross deferred tax liabilities
|
(138.1
|
)
|
|
(73.5
|
)
|
Net deferred tax assets
|
$
|
54.3
|
|
|
$
|
49.1
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In assessing the realizability of deferred tax assets, the Company analyzes whether some or all deferred tax assets will not be realized. This analysis considers historical taxable income, the projected reversal of deferred tax liabilities, projected taxable income and tax planning strategies. Based upon this analysis, it is more likely than not the deferred tax assets, net of valuation allowance, will be realized. The valuation allowance is $45.3 million and $41.5 million for fiscal 2020 and fiscal 2019, respectively. The increase is primarily due to state net operating loss carryforwards and foreign tax credits.
At October 31, 2020, we had federal net operating loss carryforwards of $20.3 million, state net operating loss carryforwards of $16.3 million, and $1.9 million of California research credit carryforwards. Federal net operating loss carryforwards of $15.8 million expire on various dates between 2024 and 2037 and $4.5 million does not expire. The state net operating loss carryforwards expire on various dates between 2021 through 2040, and the California research credit carryforwards do not expire.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized from such positions are estimated based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The changes in the balance of unrecognized tax benefits (UTB) were as follows:
|
|
|
|
|
(In millions)
|
|
Balance at October 31, 2018
|
$
|
68.9
|
|
Decrease from prior year's UTB's
|
(11.8
|
)
|
Increase from current year's UTB's
|
8.3
|
|
UTB (decrease) from tax authorities' settlements
|
(14.1
|
)
|
UTB (decrease) from expiration of statute of limitations
|
(1.6
|
)
|
Balance at October 31, 2019
|
$
|
49.7
|
|
Increase from prior year's UTB's
|
3.4
|
|
Increase from current year's UTB's
|
7.6
|
|
UTB (decrease) from expiration of statute of limitations
|
(2.2
|
)
|
Balance at October 31, 2020
|
$
|
58.5
|
|
As of October 31, 2020, 2019 and 2018 there were unrecognized tax benefits of $58.5 million, $49.7 million and $68.9 million, respectively. If recognized, these tax benefits would affect our effective tax rates for 2020, 2019 and 2018, by $46.0 million, $41.7 million and $46.6 million, respectively. It is the Company's policy to recognize interest and penalties related to income tax as income tax expense. As of October 31, 2020, 2019 and 2018, we had accrued gross interest and penalties related to unrecognized tax benefits of $7.3 million, $3.9 million and $4.4 million, respectively.
Included in the balance of unrecognized tax benefits at October 31, 2020, is $7.2 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months.
Filed tax returns are subject to examination by tax authorities in major tax jurisdictions after fiscal 2014.
Intellectual property rights
In November 2020, the Company completed an intra-group transfer of certain intellectual property and related operating assets and liabilities to its UK subsidiary as part of a group restructuring to establish headquarters operation in the UK. Under US GAAP, any profit resulting from this transfer will be eliminated upon consolidation. However, the transfer resulted in a step-up of the UK tax-deductible basis
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
in the transferred assets, including goodwill, and created a temporary difference between the book basis and the tax basis of these assets. As a result, the Company expects to recognize a deferred tax asset of up to $2.4 billion, with a corresponding income tax benefit. The valuation of the transferred assets, and the calculation of the amount of the deferred tax asset, will be finalized during the first quarter of fiscal 2021.
Note 7. Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
|
|
(In millions, except for earnings per share)
|
2020
|
|
2019
|
|
2018
|
Net income attributable to Cooper stockholders
|
$
|
238.4
|
|
|
$
|
466.7
|
|
|
$
|
139.9
|
|
Basic:
|
|
|
|
|
|
Weighted average common shares
|
49.1
|
|
|
49.4
|
|
|
49.1
|
|
Basic earnings per share attributable to Cooper stockholders
|
$
|
4.85
|
|
|
$
|
9.44
|
|
|
$
|
2.85
|
|
Diluted:
|
|
|
|
|
|
Weighted average common shares
|
49.1
|
|
|
49.4
|
|
|
49.1
|
|
Effect of dilutive stock options
|
0.5
|
|
|
0.6
|
|
|
0.6
|
|
Diluted weighted average common shares
|
49.6
|
|
|
50.0
|
|
|
49.7
|
|
Diluted earnings per share attributable to Cooper stockholders
|
$
|
4.81
|
|
|
$
|
9.33
|
|
|
$
|
2.81
|
|
The following table sets forth stock options to purchase our common stock and restricted stock units that were not included in the diluted earnings per share calculation because their effect would have been antidilutive for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
|
|
(In thousands, except exercise prices)
|
2020
|
|
2019
|
|
2018
|
Stock option shares excluded
|
207
|
|
|
198
|
|
|
257
|
|
Range of exercise prices
|
$
|
304.54
|
|
|
$
|
254.77
|
|
|
$226.30 - $230.09
|
|
Restricted stock units excluded
|
1
|
|
|
8
|
|
|
21
|
|
Note 8. Stockholders’ Equity
Analysis of Changes in Accumulated Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign Currency Translation Adjustment
|
|
Derivatives
|
|
Minimum Pension Liability
|
|
Total
|
Balance at October 31, 2017
|
$
|
(353.7
|
)
|
|
$
|
—
|
|
|
$
|
(21.6
|
)
|
|
$
|
(375.3
|
)
|
Gross change in value
|
(58.5
|
)
|
|
—
|
|
|
11.0
|
|
|
(47.5
|
)
|
Tax effect
|
—
|
|
|
—
|
|
|
(3.1
|
)
|
|
(3.1
|
)
|
ASU 2018-02 adoption (1)
|
—
|
|
|
—
|
|
|
(4.8
|
)
|
|
(4.8
|
)
|
Balance at October 31, 2018
|
$
|
(412.2
|
)
|
|
$
|
—
|
|
|
$
|
(18.5
|
)
|
|
$
|
(430.7
|
)
|
Gross change in value
|
$
|
9.0
|
|
|
$
|
—
|
|
|
$
|
(33.4
|
)
|
|
$
|
(24.4
|
)
|
Tax effect
|
—
|
|
|
—
|
|
|
8.0
|
|
|
8.0
|
|
Balance at October 31, 2019
|
$
|
(403.2
|
)
|
|
$
|
—
|
|
|
$
|
(43.9
|
)
|
|
$
|
(447.1
|
)
|
Gross change in value
|
$
|
0.9
|
|
|
$
|
(17.1
|
)
|
|
$
|
(16.8
|
)
|
|
$
|
(33.0
|
)
|
Tax effect
|
—
|
|
|
4.1
|
|
|
4.0
|
|
|
8.1
|
|
Balance at October 31, 2020
|
$
|
(402.3
|
)
|
|
$
|
(13.0
|
)
|
|
$
|
(56.7
|
)
|
|
$
|
(472.0
|
)
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
(1)
|
Represents reclassification to retained earnings from adoption of ASU 2018-02.
|
Share Repurchases
In December 2011, the Company's Board of Directors authorized the 2012 Share Repurchase Program and through subsequent amendments, the most recent in March 2017, the total repurchase authorization was increased from $500.0 million to $1.0 billion of the Company's common stock. The program has no expiration date and may be discontinued at any time. Purchases under the 2012 Share Repurchase Program are subject to a review of the circumstances in place at the time and may be made from time to time as permitted by securities laws and other legal requirements.
For the years ended October 31, 2020 and 2019, the Company share repurchases were as follow:
|
|
|
|
|
|
|
|
|
Periods Ended October 31,
|
2020
|
|
2019
|
Number of shares
|
160,850
|
|
|
536,972
|
|
Average repurchase price per share
|
$
|
296.9
|
|
|
$
|
290.7
|
|
Total costs of shares repurchased (in millions)
|
$
|
47.8
|
|
|
$
|
156.1
|
|
At October 31, 2020, $359.7 million remained authorized for repurchase under the program.
Dividends
In fiscal 2020 and 2019, the Company paid a semiannual dividend of 3 cents per share: $1.5 million or 3 cents per share on February 10, 2020 to stockholders of record on January 23, 2020; $1.5 million or 3 cents on August 7, 2020 to stockholders of record on July 23, 2020; $1.5 million or 3 cents per share on February 8, 2019 to stockholders of record on January 22, 2019; $1.5 million or 3 cents per share on August 7, 2019 to stockholders of record on July 23, 2019.
Note 9. Stock Plans
2020 Long-Term Incentive Plan for Non-Employee Directors (2020 Directors Plan)
In March 2020, we received stockholder approval of the 2020 Directors Plan. The 2020 Directors Plan authorizes either the Company's Board of Directors or a designated committee thereof composed of two or more Non-Employee Directors to grant to Non-Employee Directors equity awards for up to 50,000 shares of common stock, subject to adjustment for future stock splits, stock dividends, expirations, forfeitures and similar events.
The 2020 Directors Plan provides for annual equity award grants to Non-Employee Directors on April 1st of each fiscal year which subsequently vest on the first anniversary of the date of grant. Grants can be awarded in the form of stock options, restricted stock, restricted stock units (RSUs), or a combination of award types. Awards are made with a total target grant date value of $270,000, or $283,500 in the case of the Lead Director and $297,000 in the case of the Chairman of the Board.
Under the 2020 Directors Plan, awards are made in the form of RSUs unless otherwise approved by the Board of Directors. RSUs entitle the recipient to receive shares of common stock, without any payment in cash or property. Legal ownership of the shares is not transferred until the unit vests and issued RSUs have no dividend or voting rights prior to vesting. Awards may also be made in the form of stock options or restricted stock. In the event of such awards, grants of stock options will have an exercise price equal to 100% of fair market value on the date of grant and expire no more than 10 years after the grant date. Awards of restricted stock provide the right to receive shares, subject to such purchase price requirements,
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
restrictions on sale or transfer, or other conditions as approved by the Board of Directors. Restricted shares retain dividend and voting rights.
As of October 31, 2020, 42,929 shares remain available under the 2020 Directors' Plan for future grants.
2007 Long-Term Incentive Plan (2007 Plan)
In March 2007, we received stockholder approval of the 2007 Plan. The 2007 Plan was subsequently amended and restated, and granted stockholder approval in March 2009, March 2011, and March 2016.
The Third Amended and Restated 2007 Plan is designed to increase our stockholder value by attracting, retaining and motivating key employees and consultants who directly influence our profitability. The Third Amended and Restated 2007 Plan authorizes either our Board of Directors, or a designated committee thereof composed of two or more Non-Employee Directors, to grant to eligible individuals during the period ending December 31, 2026, up to 6,930,000 shares in the form of specified equity awards including stock option, restricted stock unit and performance share awards, subject to adjustment for future stock splits, stock dividends, expirations, forfeitures and similar events.
During fiscal 2020, we granted stock options and restricted stock units (RSUs) to employees under the Third Amended and Restated 2007 Plan. Prior to fiscal 2020 we also granted performance share awards to employees. All stock options are granted at 100% of fair market value on the date of grant and expire no more than 10 years after the grant date. RSUs are nontransferable awards entitling the recipient to receive shares of common stock, without any payment in cash or property, in one or more installments at a future date or dates as determined by the Board of Directors or its authorized committee. For RSUs, legal ownership of the shares is not transferred to the employee until the unit vests, which is generally over a specified time period and RSUs have no dividend or voting rights prior to vesting. Performance share awards are nontransferable awards entitling the recipient to receive a variable number of shares of common stock, without any payment in cash or property, in one or more installments at a future date or dates as determined by the Board of Directors or its authorized committee. Legal ownership of the shares is not transferred to the recipient until the award vests, and the number of shares distributed is dependent upon the achievement of certain performance targets over a specified period of time.
As of October 31, 2020, 1,088,901 shares remained available under the Third Amended and Restated 2007 Plan for future grants. The amount of available shares includes shares which may be distributed under performance share awards.
Share-Based Compensation
Compensation expense and the related tax benefit recognized in our consolidated financial statements for share-based awards, including the Employee Stock Purchase Plan, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Selling, general and administrative expense
|
$
|
32.2
|
|
|
$
|
28.7
|
|
|
$
|
37.6
|
|
Cost of sales
|
4.0
|
|
|
4.7
|
|
|
3.6
|
|
Research and development expense
|
2.4
|
|
|
2.9
|
|
|
2.0
|
|
Total compensation expense
|
$
|
38.6
|
|
|
$
|
36.3
|
|
|
$
|
43.2
|
|
Related income tax benefit
|
$
|
4.8
|
|
|
$
|
5.1
|
|
|
$
|
8.8
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Options
The fair value of each stock option award granted is estimated on the date of grant using the Black-Scholes option valuation model and assumptions noted in the following table. The expected life of the awards is based on the observed and expected time to post-vesting forfeiture and/or exercise. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. In determining the expected volatility, management considers implied volatility from publicly-traded options on our common stock at the date of grant, historical volatility and other factors. The risk-free interest rate is based on the continuous rates provided by the United States Treasury with a term equal to the expected life of the option. The dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the date of grant.
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
2020
|
|
2019
|
|
2018
|
Expected life
|
4.4 years
|
|
|
4.4 years
|
|
|
5.4 years
|
|
Expected volatility
|
24.5
|
%
|
|
22.0
|
%
|
|
23.0
|
%
|
Risk-free interest rate
|
1.6
|
%
|
|
2.9
|
%
|
|
2
|
%
|
Dividend yield
|
0.02
|
%
|
|
0.02
|
%
|
|
0.03
|
%
|
The activity and status of our stock option plans are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic Value
|
Outstanding at October 31, 2019
|
1,024,752
|
|
|
$
|
186.24
|
|
|
|
|
|
Granted
|
212,046
|
|
|
$
|
304.54
|
|
|
|
|
|
Exercised
|
(105,045
|
)
|
|
$
|
128.43
|
|
|
|
|
|
Forfeited or expired
|
(28,246
|
)
|
|
$
|
223.28
|
|
|
|
|
|
Outstanding at October 31, 2020
|
1,103,507
|
|
|
$
|
213.53
|
|
|
6.44
|
|
|
Vested and expected to vest at October 31, 2020
|
1,060,738
|
|
|
$
|
211.04
|
|
|
6.36
|
|
$
|
114,567,509
|
|
Vested and exercisable at October 31, 2020
|
430,926
|
|
|
$
|
167.09
|
|
|
5.01
|
|
$
|
65,485,571
|
|
The weighted-average fair value of each option granted during fiscal 2020, estimated as of the grant date using the Black-Scholes option pricing model, for the 2007 Plan was $70.45. No options were granted under the 2020 Directors Plan in fiscal 2020. The total intrinsic value of options exercised during the fiscal year ended October 31, 2020 was $22.6 million.
The weighted-average fair value of each option granted during fiscal 2019, estimated as of the grant date using the Black-Scholes option pricing model, for the 2007 Plan was $60.71.
Stock awards outstanding under our current plans have been granted at prices which are either equal to or above the market value of the common stock on the date of grant. Options granted under the 2007 Plan generally vest over a range of three to five years based on service conditions and expire no later than ten years after the grant date. Options granted under the 2020 Directors Plan generally vested in one year and expire no later than ten years after the grant date. We generally recognize compensation expense ratably over the vesting period. However, Directors' options grants would have been expensed on the date of grant as the 2020 Directors Plan did not contain a substantive future requisite service period. As of October 31, 2020, there was $20.9 million of total unrecognized compensation cost related to nonvested options, which is expected to be recognized over a remaining weighted-average vesting period of 3.4 years.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Restricted Stock Units
RSUs granted under the 2007 Plan generally vest over three to five years. RSUs granted under the 2020 Directors Plan vest in one year. The fair value of RSUs is estimated on the date of grant based on the market price of our common stock. We recognize compensation expense ratably over the vesting period. As of October 31, 2020, there was $61.6 million of total unrecognized compensation cost related to nonvested RSUs, which is expected to be recognized over a remaining weighted-average vesting period of 3.2 years.
The status of our non-vested RSUs is summarized below:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date Fair
Value Per Share
|
Non-vested RSUs at October 31, 2019
|
429,571
|
|
|
$
|
210.72
|
|
Granted
|
130,610
|
|
|
$
|
301.59
|
|
Vested and issued
|
(151,613
|
)
|
|
$
|
192.10
|
|
Forfeited or expired
|
(39,948
|
)
|
|
$
|
242.12
|
|
Non-vested RSUs at October 31, 2020
|
368,620
|
|
|
$
|
247.09
|
|
Performance Units
Performance units may be granted to selected key employees with vesting contingent upon meeting future reported earnings per share goals over a defined performance cycle, usually three years. Performance units, if earned, may be paid in cash or shares of common stock. The performance shares actually earned will range from zero to 150% of the target number of performance shares for performance periods ending in fiscal 2019 through fiscal 2020. Subject to limited exceptions set forth in the performance share plan, any shares earned will be distributed in the subsequent fiscal year after the performance period. The fair value of performance unit awards is estimated on the date of grant based on the current market price of our common stock and the estimate of probability of award achievement. This estimate is reviewed each fiscal quarter and adjustments are recorded if it is determined that the estimate of probability of award achievement has changed.
We recognize compensation expense ratably over the vesting period. As of October 31, 2020, there was no unrecognized compensation cost related to non-vested performance units.
Employee Stock Purchase Plan
On March 18, 2019, the Company received stockholder approval for the Employee Stock Purchase Plan (ESPP). The first offering period began on November 4, 2019 and offerings are generally made on a quarterly basis. The purpose of the ESPP is to provide eligible employees of the Company with the opportunity to acquire shares of common stock at 85% of the market price on the last business day of each offering period by means of accumulated payroll deductions. Payroll deductions will be limited to maximum of 15% of the employee’s eligible compensation, not to exceed $21.3 thousand in any one calendar year. The ESPP initially authorized the issuance of 1,000,000 shares of common stock. These shares will be made available from shares of common stock reacquired by the Company as Treasury Stock. During fiscal year ended October 31, 2020, we issued 11,641 shares to our employees under the ESPP. At October 31, 2020, the number of shares remaining available for future issuance under the ESPP was 988,359 shares. Total ESPP share-based compensation recognized during the fiscal year ended October 31, 2020 was $0.7 million.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10. Employee Benefits
Cooper's Retirement Income Plan
Cooper's Retirement Income Plan (Plan), a defined benefit plan, covers substantially all full-time United States employees. Cooper's contributions are designed to fund normal cost on a current basis and to fund the estimated prior service cost of benefit improvements. The unit credit actuarial cost method is used to determine the annual cost. Cooper pays the entire cost of the Plan and funds such costs as they accrue. Virtually all of the assets of the Plan are comprised of equities and participation in equity and fixed income funds.
The Company uses individual spot rates along the yield curve that correspond with the timing of each benefit payment to determine the service and interest costs of components of its net periodic benefit cost utilizing the correlation of projected cash outflows and corresponding spot rates on the yield curve.
The following table sets forth the Plan's benefit obligations and fair value of the Plan assets at October 31, 2020, 2019 and 2018 and the funded status of the Plan and net periodic pension costs for each of the years in the three-year periods ended October 31, 2020.
Retirement Income Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Change in benefit obligation
|
|
|
|
|
|
Benefit obligation, beginning of year
|
$
|
189.7
|
|
|
$
|
147.1
|
|
|
$
|
151.7
|
|
Service cost
|
13.9
|
|
|
10.1
|
|
|
10.7
|
|
Interest cost
|
5.2
|
|
|
6.1
|
|
|
5.0
|
|
Benefits paid
|
(10.0
|
)
|
|
(10.2
|
)
|
|
(3.7
|
)
|
Actuarial loss (gain)
|
20.0
|
|
|
36.6
|
|
|
(16.6
|
)
|
Benefit obligation, end of year
|
$
|
218.8
|
|
|
$
|
189.7
|
|
|
$
|
147.1
|
|
Change in plan assets
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
$
|
136.0
|
|
|
$
|
121.0
|
|
|
$
|
112.8
|
|
Actual return on plan assets
|
10.1
|
|
|
12.1
|
|
|
1.9
|
|
Employer contributions
|
23.4
|
|
|
13.1
|
|
|
10.0
|
|
Benefits paid
|
(10.0
|
)
|
|
(10.2
|
)
|
|
(3.7
|
)
|
Fair value of plan assets, end of year
|
$
|
159.5
|
|
|
$
|
136.0
|
|
|
$
|
121.0
|
|
Funded status at end of year
|
$
|
(59.3
|
)
|
|
$
|
(53.7
|
)
|
|
$
|
(26.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Amounts recognized in the statement of financial position consist of:
|
|
|
|
|
|
Noncurrent liabilities
|
(59.3
|
)
|
|
(53.7
|
)
|
|
(26.1
|
)
|
Net amount recognized at year end
|
$
|
(59.3
|
)
|
|
$
|
(53.7
|
)
|
|
$
|
(26.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Amounts recognized in accumulated other comprehensive income consist of:
|
|
|
|
|
|
Net loss
|
74.2
|
|
|
57.3
|
|
|
24.0
|
|
Accumulated other comprehensive income
|
$
|
74.2
|
|
|
$
|
57.3
|
|
|
$
|
24.0
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Information for pension plans with projected benefit obligation in excess of plan assets:
|
|
|
|
|
|
Projected benefit obligation
|
$
|
218.8
|
|
|
$
|
189.7
|
|
|
$
|
147.1
|
|
Fair value of plan assets
|
$
|
159.5
|
|
|
$
|
136.0
|
|
|
$
|
121.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Information for pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
Accumulated benefit obligation
|
$
|
195.8
|
|
|
$
|
170.8
|
|
|
$
|
130.5
|
|
Fair value of plan assets
|
$
|
159.5
|
|
|
$
|
136.0
|
|
|
$
|
121.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Reconciliation of prepaid (accrued) pension cost:
|
|
|
|
|
|
Accrued pension cost at prior fiscal year end
|
$
|
(3.7
|
)
|
|
$
|
2.2
|
|
|
$
|
4.0
|
|
Net periodic benefit cost
|
12.3
|
|
|
7.2
|
|
|
8.2
|
|
Contributions made during the year
|
(23.4
|
)
|
|
(13.1
|
)
|
|
(10.0
|
)
|
Accrued pension cost at fiscal year end
|
$
|
(14.8
|
)
|
|
$
|
(3.7
|
)
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Components of net periodic benefit cost and other amounts recognized in (other comprehensive income) the fiscal year:
|
|
|
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
Service cost
|
$
|
13.9
|
|
|
$
|
10.1
|
|
|
$
|
10.7
|
|
Interest cost
|
5.2
|
|
|
6.1
|
|
|
5.0
|
|
Expected return on plan assets
|
(10.8
|
)
|
|
(9.8
|
)
|
|
(9.2
|
)
|
Recognized actuarial loss
|
4.0
|
|
|
0.8
|
|
|
1.7
|
|
Net periodic pension cost
|
$
|
12.3
|
|
|
$
|
7.2
|
|
|
$
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
(In millions)
|
2020
|
|
2019
|
|
2018
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
Net loss (gain)
|
20.8
|
|
|
34.2
|
|
|
(9.3
|
)
|
Amortizations of net (gain)
|
(4.0
|
)
|
|
(0.8
|
)
|
|
(1.7
|
)
|
Total recognized in other comprehensive income
|
$
|
16.8
|
|
|
$
|
33.4
|
|
|
$
|
(11.0
|
)
|
Total recognized in net periodic benefit cost and other comprehensive income
|
$
|
29.0
|
|
|
$
|
40.6
|
|
|
$
|
(2.8
|
)
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
2020
|
|
2019
|
|
2018
|
Weighted-average assumptions used in computing the net periodic pension cost and projected benefit obligation at year end:
|
|
|
|
|
|
Discount rate for determining net periodic pension cost:
|
|
|
|
|
|
Projected Benefit Obligation
|
3.13
|
%
|
|
4.42
|
%
|
|
3.75
|
%
|
Service Cost
|
3.18
|
%
|
|
4.49
|
%
|
|
3.85
|
%
|
Interest Cost
|
2.78
|
%
|
|
4.22
|
%
|
|
3.39
|
%
|
Discount rate for determining benefit obligations at year end
|
2.78
|
%
|
|
3.13
|
%
|
|
4.42
|
%
|
Rate of compensation increase for determining expense
|
3.60
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Rate of compensation increase for determining benefit obligations at year end
|
3.60
|
%
|
|
3.60
|
%
|
|
4.00
|
%
|
Expected rate of return on plan assets for determining net periodic pension cost
|
8.00
|
%
|
|
8.00
|
%
|
|
8.00
|
%
|
Expected rate of return on plan assets at year end
|
8.00
|
%
|
|
8.00
|
%
|
|
8.00
|
%
|
Measurement date for determining assets and benefit obligations at year end
|
10/31/2020
|
|
|
10/31/2019
|
|
|
10/31/2018
|
|
The discount rate enables us to state expected future cash flows at a present value on the measurement date. The discount rate used for the Plan is based primarily on the yields of a universe of high quality corporate bonds rated AA or above, with durations corresponding to the expected durations of the benefit obligations. A change in the discount rate will cause the present value of benefit obligations to change in the opposite direction. If a discount rate of 3.13%, which is 1.29% lower than prior fiscal year, had been used, the projected benefit obligation would have been $207.8 million, and the accumulated benefit obligation would have been $186.3 million.
The expected rate of return on plan assets was determined based on a review of historical returns, both for this plan and for medium- to large-sized defined benefit pension funds with similar asset allocations. This review generated separate expected returns for each asset class listed below. These expected future returns were then blended based on this Plan's target asset allocation.
Reasons for Significant Liability Gains and Losses
The projected benefit obligation experienced a net loss of approximately $20.0 million during the year. This loss is primarily due to losses from assumption changes of approximately $18.1 million, and losses of approximately $1.9 million due to demographic experience. The key assumption changes were the decrease in the discount rate (loss of $11.0 million), changes in assumptions for lump sum determination (loss of $8.4 million), and a change to the mortality table (gain of $1.3 million). The primary reasons for demographic losses were salary increases higher than expected, an increase in the number of participants, and the net impact of other demographic changes.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Plan Assets
Weighted-average asset allocations at year end, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
2020
|
|
2019
|
|
2018
|
Asset category
|
|
|
|
|
|
Cash and cash equivalents
|
11.8
|
%
|
|
3.2
|
%
|
|
2.1
|
%
|
Corporate common stock
|
—
|
%
|
|
—
|
%
|
|
14.5
|
%
|
Equity mutual funds
|
57.7
|
%
|
|
63.7
|
%
|
|
47.4
|
%
|
Hedging Strategy Funds
|
4.3
|
%
|
|
4.9
|
%
|
|
—
|
%
|
Real estate funds
|
—
|
%
|
|
—
|
%
|
|
2.7
|
%
|
Bond mutual funds
|
26.2
|
%
|
|
28.2
|
%
|
|
33.3
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
The Plan invests in a diversified portfolio of assets intended to minimize risk of poor returns while maximizing expected portfolio returns. To achieve the long-term rate of return, plan assets will be invested in a mixture of instruments, including but not limited to, corporate common stock (may include the Company's stock), investment grade bond funds, cash, balanced funds, real estate funds, small or large cap equity funds and international equity funds. The allocation of assets will be determined by the investment manager and will typically include 50% to 70% equities with the remainder invested in fixed income, real estate, alternatives and cash. Presently, this diversified portfolio is expected to return roughly 8% in the long run.
As of the measurement date of October 31, 2020, the fair value measurement of plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Asset category
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
18.8
|
|
|
$
|
—
|
|
|
$
|
18.8
|
|
|
$
|
—
|
|
Equity mutual funds
|
91.9
|
|
|
91.9
|
|
|
—
|
|
|
—
|
|
Hedging Strategy Funds
|
6.9
|
|
|
6.9
|
|
|
—
|
|
|
—
|
|
Bond mutual funds
|
41.9
|
|
|
15.4
|
|
|
26.5
|
|
|
—
|
|
Total
|
$
|
159.5
|
|
|
$
|
114.2
|
|
|
$
|
45.3
|
|
|
$
|
—
|
|
The Plan has an established process for determining the fair value of plan assets. Fair value is based upon quoted market prices, as Level 1 inputs, where available. For investments in equity and bond mutual funds, and real estate funds, fair value is based on observable, Level 1 inputs, as price quotes are available and the fair values of these funds were not impacted by liquidity restrictions or the fund status. Level 2 assets are those where price quotes are not readily available and the fair value would be determined based on other observable inputs. Level 3 assets are those where price quotes are not readily available and the fair value would be determined based on unobservable inputs.
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Plan Cash Flows
Contributions
The Company contributions to the Plan were $23.4 million for fiscal 2020, $13.1 million for fiscal 2019 and, $10.0 million for fiscal 2018. The Company closely monitors the funded status of the Plan with respect to legislative and accounting rules. The Company expects to make contributions of approximately $10.0 million during fiscal 2021.
Estimated Future Benefit Payments
|
|
|
|
|
Years
(In millions)
|
|
2021
|
$
|
10.0
|
|
2022
|
$
|
11.0
|
|
2023
|
$
|
11.9
|
|
2024
|
$
|
12.9
|
|
2025
|
$
|
13.7
|
|
2026-2030
|
$
|
76.3
|
|
Plan Soft Freeze
On June 18, 2019 the Board of Directors of the Company approved a soft freeze of the Plan effective August 1, 2019. The Plan was closed to employees hired on or after August 1, 2019, including former participants or employees rehired on or after August 1, 2019 and employees hired in connection with a stock or asset acquisition, merger or other similar transaction on or after August 1, 2019. Existing employees already covered by the Plan, continue to accrue their benefits. There was no material impact on the Company's results of operations, financial position and cash flows for fiscal 2020 or fiscal 2019.
Cooper's 401(k) Savings Plan
Cooper's 401(k) savings plan provides for the deferral of compensation as described in the Internal Revenue Code and is available to substantially all United States employees. Employees who participate in the 401(k) plan may elect to have up to 75% of their pre-tax salary or wages deferred and contributed to the trust established under the Plan. Cooper's contributions on account of participating employees, were $6.8 million, $6.5 million and $5.9 million for the years ended October 31, 2020, 2019 and 2018, respectively.
International Pension Plans
For its employees outside the United States, the Company also participates in country-specific defined contribution plans and government-sponsored retirement plans. The defined contribution plans are administered by third-party trustees and the Company is not directly responsible for providing benefits to participants of government-sponsored plans. The Company’s contributions to such plans are not significant individually or in the aggregate.
Note 11. Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. An asset’s or liability’s level is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are valued and disclosed in one of the following three levels of the valuation hierarchy:
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.
At October 31, 2020 and October 31, 2019, the carrying value of cash and cash equivalents, accounts receivable, prepaid expense and other current assets, lines of credit, accounts payable and other current liabilities approximate fair value due to the short-term nature of such instruments and the ability to obtain financing on similar terms.
The carrying value of the Company's revolving credit facility and term loans approximates fair value based on current market rates (Level 2). On April 6, 2020 the Company entered into six interest rate swap contracts which are used to hedge its exposure to changes in cash flows associated with its variable rate term loans and are designated as derivatives in a cash flow hedge. The payment streams are based on a total notional amount of $1.5 billion at the inception of the contracts. The interest rate swap contracts have maturities of seven years or less. On October 1, 2020, one of the six interest rate swap contracts matured. The outstanding contracts as of October 31, 2020 have a total notional amount of $1.4 billion.
The gain or loss on the derivatives is recorded as a component of accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings.
The fair value of the interest rate swap contracts is measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap contracts were categorized as Level 2 in the fair value hierarchy, as the inputs to the derivative pricing model are generally observable and do not contain a high level of subjectivity. Refer to Note 14. Financial Derivatives and Hedging for further information.
The Company did not have any cross-currency swaps or foreign currency forward contracts as of October 31, 2020.
Nonrecurring fair value measurements
The Company uses fair value measures when determining assets and liabilities acquired in an acquisition as described in Note 3. Acquisitions which are considered a Level 3 measurement.
Note 12. Contingencies
Legal Proceedings
The Company is involved in various lawsuits, claims and other legal matters from time to time that arise in the ordinary course of conducting business, including matters involving our products, intellectual property, supplier relationships, distributors, competitor relationships, employees and other matters. The Company does not believe that the ultimate resolution of these proceedings or claims pending against it could have a material adverse effect on its financial condition or results of operations. At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, Contingencies. Legal fees are expensed as incurred.
Note 13. Business Segment Information
The Company discloses information about its operating segments, which were established based on the way that management organizes segments within the Company for making operating decisions and assessing financial performance. The Company's two operating segments are described below.
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
•
|
CooperVision. Competes in the worldwide contact lens market by developing, manufacturing and marketing a broad range of products for contact lens wearers, featuring advanced materials and optics. CooperVision designs its products to solve vision challenges such as astigmatism, presbyopia, myopia, ocular dryness and eye fatigues, with a broad collection of spherical, toric and multifocal contact lenses.
|
|
|
•
|
CooperSurgical. Competes in the general health care market with a focus on advancing the health of women, babies and families through a diversified portfolio of products and services focusing on women's health and fertility.
|
Cooper uses operating income, as presented in our financial reports, as the primary measure of segment profitability. We do not allocate costs from corporate functions to segment operating income. Items below operating income are not considered when measuring the profitability of a segment. We use the same accounting policies to generate segment results as we do for our consolidated results.
Total net sales include sales to customers as reported in our Consolidated Statements of Income and sales between geographic areas that are priced at terms that allow for a reasonable profit for the seller. Operating income (loss) is total net sales less cost of sales, selling, general and administrative expenses, research and development expenses, amortization and intangible impairments. Corporate operating loss is principally corporate headquarters expense. Interest expense, and other income and expenses are not allocated to individual segments.
No customers accounted for 10% or more of our consolidated net revenue in the fiscal 2020, 2019 and 2018.
Identifiable assets are those used in continuing operations except cash and cash equivalents, which we include as corporate assets. Long-lived assets are net property, plant and equipment.
The following table presents a summary of our business segment net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
CooperVision net sales by category:
|
|
|
|
|
|
Toric lens
|
$
|
598.2
|
|
|
$
|
620.0
|
|
|
$
|
591.4
|
|
Multifocal lens
|
197.0
|
|
|
202.9
|
|
|
196.6
|
|
Single-use sphere lens
|
529.0
|
|
|
568.2
|
|
|
520.1
|
|
Non single-use sphere, other
|
518.8
|
|
|
581.8
|
|
|
573.9
|
|
Total CooperVision net sales
|
1,843.0
|
|
|
1,972.9
|
|
|
1,882.0
|
|
CooperSurgical net sales by category:
|
|
|
|
|
|
Office and surgical products
|
358.8
|
|
|
422.4
|
|
|
400.4
|
|
Fertility
|
229.1
|
|
|
258.1
|
|
|
250.4
|
|
Total CooperSurgical net sales
|
587.9
|
|
|
680.5
|
|
|
650.8
|
|
Total net sales
|
$
|
2,430.9
|
|
|
$
|
2,653.4
|
|
|
$
|
2,532.8
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information by business segment for each of the years in the three-year period ended October 31, 2020, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
CooperVision
|
|
CooperSurgical
|
|
Corporate
|
|
Consolidated
|
2020
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,843.0
|
|
|
$
|
587.9
|
|
|
$
|
—
|
|
|
$
|
2,430.9
|
|
Operating income (loss)
|
$
|
375.7
|
|
|
$
|
(14.7
|
)
|
|
$
|
(49.2
|
)
|
|
$
|
311.8
|
|
Interest expense
|
|
|
|
|
|
|
36.8
|
|
Other expense, net
|
|
|
|
|
|
|
8.5
|
|
Income before income taxes
|
|
|
|
|
|
|
$
|
266.5
|
|
Identifiable assets
|
$
|
4,236.3
|
|
|
$
|
2,293.8
|
|
|
$
|
207.4
|
|
|
$
|
6,737.5
|
|
Depreciation expense
|
$
|
138.2
|
|
|
$
|
11.7
|
|
|
$
|
—
|
|
|
$
|
149.9
|
|
Amortization expense
|
$
|
32.4
|
|
|
$
|
104.8
|
|
|
$
|
—
|
|
|
$
|
137.2
|
|
Capital expenditures
|
$
|
260.3
|
|
|
$
|
50.1
|
|
|
$
|
—
|
|
|
$
|
310.4
|
|
2019
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,972.9
|
|
|
$
|
680.5
|
|
|
$
|
—
|
|
|
$
|
2,653.4
|
|
Operating income (loss)
|
$
|
506.4
|
|
|
$
|
87.9
|
|
|
$
|
(47.6
|
)
|
|
$
|
546.7
|
|
Interest expense
|
|
|
|
|
|
|
68.0
|
|
Other (income), net
|
|
|
|
|
|
|
1.3
|
|
Income before income taxes
|
|
|
|
|
|
|
$
|
477.4
|
|
Identifiable assets
|
$
|
3,911.6
|
|
|
$
|
2,189.8
|
|
|
$
|
173.1
|
|
|
$
|
6,274.5
|
|
Depreciation expense
|
$
|
125.8
|
|
|
$
|
9.0
|
|
|
$
|
0.2
|
|
|
$
|
135.0
|
|
Amortization expense
|
$
|
40.9
|
|
|
$
|
104.9
|
|
|
$
|
—
|
|
|
$
|
145.8
|
|
Capital expenditures
|
$
|
259.0
|
|
|
$
|
33.1
|
|
|
$
|
—
|
|
|
$
|
292.1
|
|
2018
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,882.0
|
|
|
$
|
650.8
|
|
|
$
|
—
|
|
|
$
|
2,532.8
|
|
Operating income (loss)
|
$
|
479.8
|
|
|
$
|
(19.9
|
)
|
|
$
|
(56.8
|
)
|
|
$
|
403.1
|
|
Interest expense
|
|
|
|
|
|
|
82.7
|
|
Other expense, net
|
|
|
|
|
|
|
(11.5
|
)
|
Income before income taxes
|
|
|
|
|
|
|
$
|
331.9
|
|
Identifiable assets
|
$
|
3,746.0
|
|
|
$
|
2,201.7
|
|
|
$
|
165.1
|
|
|
$
|
6,112.8
|
|
Depreciation expense
|
$
|
120.1
|
|
|
$
|
8.1
|
|
|
$
|
0.2
|
|
|
$
|
128.4
|
|
Amortization expense
|
$
|
43.6
|
|
|
$
|
103.1
|
|
|
$
|
—
|
|
|
$
|
146.7
|
|
Capital expenditures
|
$
|
178.4
|
|
|
$
|
15.1
|
|
|
$
|
0.1
|
|
|
$
|
193.6
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information by geographical area by country of domicile for each of the years in the three-year period ended October 31, 2020, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
United
States
|
|
Europe
|
|
Rest of
World, Other
Eliminations
& Corporate
|
|
Consolidated
|
2020
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
$
|
1,103.6
|
|
|
$
|
789.8
|
|
|
$
|
537.5
|
|
|
$
|
2,430.9
|
|
Sales between geographic areas
|
391.7
|
|
|
327.1
|
|
|
(718.8
|
)
|
|
—
|
|
Net sales
|
$
|
1,495.3
|
|
|
$
|
1,116.9
|
|
|
$
|
(181.3
|
)
|
|
$
|
2,430.9
|
|
Operating income (loss)
|
$
|
(14.5
|
)
|
|
$
|
21.9
|
|
|
$
|
304.4
|
|
|
$
|
311.8
|
|
Long-lived assets
|
$
|
721.3
|
|
|
$
|
363.0
|
|
|
$
|
197.6
|
|
|
$
|
1,281.9
|
|
2019
|
|
|
|
|
|
|
|
Sales to unaffiliated customers
|
$
|
1,211.8
|
|
|
$
|
854.8
|
|
|
$
|
586.8
|
|
|
$
|
2,653.4
|
|
Sales between geographic areas
|
650.7
|
|
|
300.8
|
|
|
(951.5
|
)
|
|
—
|
|
Net sales
|
$
|
1,862.5
|
|
|
$
|
1,155.6
|
|
|
$
|
(364.7
|
)
|
|
$
|
2,653.4
|
|
Operating income (loss)
|
$
|
83.2
|
|
|
$
|
29.3
|
|
|
$
|
434.2
|
|
|
$
|
546.7
|
|
Long-lived assets
|
$
|
626.5
|
|
|
$
|
358.8
|
|
|
$
|
146.8
|
|
|
$
|
1,132.1
|
|
2018
|
|
|
|
|
|
|
|
Sales to unaffiliated customers
|
$
|
1,162.2
|
|
|
$
|
846.5
|
|
|
$
|
524.1
|
|
|
$
|
2,532.8
|
|
Sales between geographic areas
|
274.3
|
|
|
407.1
|
|
|
(681.4
|
)
|
|
—
|
|
Net sales
|
$
|
1,436.5
|
|
|
$
|
1,253.6
|
|
|
$
|
(157.3
|
)
|
|
$
|
2,532.8
|
|
Operating income
|
$
|
(39.3
|
)
|
|
$
|
(16.8
|
)
|
|
$
|
459.2
|
|
|
$
|
403.1
|
|
Long-lived assets
|
$
|
516.7
|
|
|
$
|
340.7
|
|
|
$
|
118.6
|
|
|
$
|
976.0
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 14. Financial Derivatives and Hedging
As part of the Company’s overall risk management practices the Company enters into financial derivatives, interest rate swaps designated as cash flow hedges, to hedge the floating interest rate on its debt.
The Company records all derivatives on its consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. All of the Company's derivatives have satisfied the criteria necessary to apply hedge accounting.
The gain or loss on derivative instruments designated and qualifying for cash flow hedge accounting is deferred in other comprehensive income. The changes in fair value for all trades that are not designated for hedge accounting are recognized in current period earnings. Deferred gains or losses from designated cash flow hedges are reclassified into earnings in the period that the hedged interest expense affects earnings. The effectiveness of cash flow hedges is assessed at inception and quarterly thereafter. The Company does not offset fair value amounts recognized for derivative instruments in its consolidated balance sheet for presentation purposes.
Credit risk related to derivative transactions reflects the risk that a party to the transaction could fail to meet its obligation under the derivative contracts. Therefore, the Company’s exposure to the counterparty’s credit risk is generally limited to the amounts, if any, by which the counterparty’s obligations to the Company exceed the Company’s obligations to the counterparty. The Company’s policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings to help mitigate counterparty credit risk.
As of October 31, 2020, the Company had the following outstanding derivatives designated as hedging instruments:
|
|
|
|
|
|
|
(In millions, except for number of instruments)
|
Number of Instruments
|
|
Notional Value
|
Interest Rate Swap Contracts
|
5
|
|
$
|
1,400
|
|
These contracts have maturities of seven years or less.
The pre-tax impact of loss on derivatives designated for hedge accounting recognized in other comprehensive income (loss) was $17.1 million ($13.0 million, net of tax) as of October 31, 2020. The Company did not have any derivatives designated as hedging instruments for the period ended October 31, 2019.
The following table summarizes the fair values of derivative instruments as of the periods indicated and the line items in the accompanying consolidated balance sheets where the instruments are recorded:
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
(In millions)
|
|
|
|
October 31, 2020
|
Derivatives designated as cash flow hedges
|
|
Balance sheet location
|
|
|
Interest rate swap contracts
|
|
Other current liabilities
|
|
$
|
0.6
|
|
Interest rate swap contracts
|
|
Other non-current liabilities
|
|
16.5
|
|
|
|
|
|
$
|
17.1
|
|
The following table summarizes the amounts recognized with respect to our derivative instruments within the accompanying consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periods Ended October 31,
|
|
|
|
|
|
|
|
(In millions)
|
|
|
2020
|
|
2019
|
|
2018
|
Derivatives designated as cash flow hedges
|
|
Location of Loss Recognized on Derivatives
|
|
|
|
|
|
Interest rate swap contracts
|
|
Interest expense
|
$
|
3.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company expects that $6.8 million recorded as a component of accumulated other comprehensive income (loss) will be realized in the statements of earnings over the next twelve months and the amount will vary depending on prevailing interest rates.
The following table details the changes in accumulated other comprehensive income:
|
|
|
|
|
|
(In millions)
|
|
Amount
|
Beginning balance gain / (loss) as of October 31, 2019
|
|
$
|
—
|
|
Amount recognized in other comprehensive income on interest rate swap contracts (net of tax of $5.0 million)
|
|
(20.8
|
)
|
Amount reclassified from other comprehensive income into earnings, gross (net of tax of $0.9 million)
|
|
3.7
|
|
Ending balance loss as of October 31, 2020
|
|
$
|
(17.1
|
)
|
Note 15. Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except for earnings per share)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2020
|
|
|
|
|
|
|
|
Net sales
|
$
|
646.2
|
|
|
$
|
524.9
|
|
|
$
|
578.2
|
|
|
$
|
681.6
|
|
Gross profit
|
$
|
426.5
|
|
|
$
|
323.5
|
|
|
$
|
360.8
|
|
|
$
|
424.0
|
|
Income before income taxes
|
$
|
97.4
|
|
|
$
|
9.0
|
|
|
$
|
66.4
|
|
|
$
|
93.7
|
|
Net income attributable to Cooper stockholders
|
$
|
90.5
|
|
|
$
|
11.5
|
|
|
$
|
55.2
|
|
|
$
|
81.2
|
|
Earnings per share attributable to Cooper stockholders - basic
|
$
|
1.84
|
|
|
$
|
0.23
|
|
|
$
|
1.13
|
|
|
$
|
1.65
|
|
Earnings per share attributable to Cooper stockholders - diluted
|
$
|
1.82
|
|
|
$
|
0.23
|
|
|
$
|
1.12
|
|
|
$
|
1.64
|
|
2019
|
|
|
|
|
|
|
|
Net sales
|
$
|
628.1
|
|
|
$
|
654.3
|
|
|
$
|
679.4
|
|
|
$
|
691.6
|
|
Gross profit
|
$
|
418.5
|
|
|
$
|
432.6
|
|
|
$
|
450.7
|
|
|
$
|
455.0
|
|
Income before income taxes
|
$
|
93.8
|
|
|
$
|
128.1
|
|
|
$
|
127.0
|
|
|
$
|
128.5
|
|
Net income attributable to Cooper stockholders
|
$
|
103.2
|
|
|
$
|
122.4
|
|
|
$
|
120.1
|
|
|
$
|
121.0
|
|
Earnings per share attributable to Cooper stockholders - basic
|
$
|
2.09
|
|
|
$
|
2.48
|
|
|
$
|
2.43
|
|
|
$
|
2.44
|
|
Earnings per share attributable to Cooper stockholders - diluted
|
$
|
2.07
|
|
|
$
|
2.45
|
|
|
$
|
2.40
|
|
|
$
|
2.42
|
|
THE COOPER COMPANIES, INC. AND SUBSIDIARIES