Business context and reporting period
The Cooper Companies, Inc. (NYSE: COO) filed this Form 10-K for the fiscal year ended October 31, 2015. The company operates CooperVision, a global contact-lens business, and CooperSurgical, a women’s-health medical-device and fertility business. Figures below are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $1.797 billion | $1.718 billion |
| Gross profit / margin | $1.070 billion / 60% | $1.092 billion / 64% |
| Operating income / margin | $236.7 million / 13% | $306.5 million / 18% |
| Net income attributable to Cooper stockholders | $203.5 million | $269.9 million |
| Diluted EPS | $4.14 | $5.51 |
| Operating cash flow | $391.0 million | $454.8 million |
| Capital expenditures | $243.0 million | $238.1 million |
| Total debt at year-end | $1.350 billion | $1.382 billion |
Revenue rose 5%, but lower gross margin and higher operating costs reduced operating income 23% and diluted EPS 25%. Interest expense increased to $18.1 million from $8.0 million. The reported effective tax rate was 4.8%, versus 8.3%; management attributed the low rate largely to foreign earnings taxed at lower rates and discrete items. Cash and cash equivalents were $16.4 million, working capital was $272.6 million, and $890.8 million remained available on the revolving credit facility. Management said cash, operating cash flow and borrowing capacity should fund operations and anticipated requirements; additional debt financing may be sought depending on business activity.
CooperVision sales increased 7% to $1.488 billion; silicone-hydrogel products grew 19% and represented 55% of its sales. Foreign-exchange movements reduced CooperVision sales by $138.4 million. CooperSurgical sales fell 5% to $309.3 million, with declines in office/surgical and fertility categories. FY2015 operating cash flow less capital expenditures was approximately $148 million.
Fiscal fourth quarter
For the quarter ended October 31, 2015, sales were $455.5 million, gross profit $253.3 million, pretax income $36.4 million, net income attributable to Cooper stockholders $36.7 million, and diluted EPS $0.75. The filing notes that Q4 included acquisition integration and restructuring charges.
Material changes versus the prior comparable period
- Sales growth was led by CooperVision, while CooperSurgical revenue declined; currency headwinds affected international results.
- Consolidated gross margin fell four percentage points, principally reflecting foreign exchange, Sauflon-related product and equipment rationalization, and new-facility start-up costs.
- FY2015 included $126.4 million of acquisition, integration, restructuring and related costs, primarily associated with Sauflon and certain legal matters, and $51.5 million of intangible amortization. These items weighed on reported profitability.
- Operating cash flow declined $63.9 million, reflecting lower net income, the $17.0 million JJVC settlement and unfavorable working-capital changes. Capital spending remained elevated to expand manufacturing capacity.
- Debt was slightly lower overall, but short-term debt increased, including $200 million drawn on new uncommitted credit lines and used to repay higher-interest revolving debt.
Outlook, risks, contingencies and unusual items
Management expressed long-term optimism about contact lenses and women’s healthcare, while warning that global-market uncertainty, currency volatility, European debt concerns and healthcare-industry consolidation could constrain FY2016 performance. No specific FY2016 revenue or EPS guidance is provided. The company forecast FY2016 amortization of about $50.6 million in total and expected continued investment in single-use contact-lens manufacturing capacity. Management expected Reprogenetics, acquired for $46.8 million in August 2015, to be neutral to EPS through FY2016, excluding acquisition costs and related amortization.
- Acquisitions and restructuring: Sauflon was acquired in August 2014 for approximately $1.13 billion. The estimated Sauflon restructuring plan totaled $112 million; $91.7 million had been incurred cumulatively by October 31, 2015. Operating-expense activities were expected to be substantially complete in FY2016 Q1, with manufacturing-related costs continuing through FY2016.
- Legal matters: CooperVision paid $17.0 million in July 2015 to settle patent disputes with Johnson & Johnson Vision Care; the settlement included reciprocal patent licenses and covenants, without admission of liability. More than 50 putative consumer class actions alleging price-related antitrust conduct were consolidated in federal court. Cooper denies the allegations; the company could not assess whether a loss was probable or estimate a potential loss range.
- Operating and regulatory risks: Risks include intense competition, product acceptance and approval delays, reliance on sole-source silicone-hydrogel materials, manufacturing concentration, recalls, healthcare regulation, genetic-testing oversight, cyber and ERP implementation risks, and foreign-exchange and interest-rate exposure.
- Debt and rate sensitivity: The company reported compliance with debt covenants (total leverage ratio 2.38 versus a maximum 3.75). A 1% interest-rate change was estimated to alter annual interest expense by about $11.1 million. A 5% currency-rate move was not expected to have a material adverse impact, though currency reduced reported sales.
- Other items: The U.S. pension plan was underfunded by $37.8 million; management expected a $10.0 million contribution in FY2016. Approximately $28.4 million of uncertain-tax-position payments were excluded from contractual-obligation timing because the timing could not be reliably estimated.
Important facts for investors to verify
- Whether CooperVision can restore margins as Sauflon rationalization and integration costs wind down, and whether planned single-use capacity supports profitable growth.
- How much restructuring spending remains, when manufacturing-related actions conclude, and whether expected synergies are realized.
- Developments in the consolidated contact-lens class actions, including any later estimate of potential exposure.
- Debt maturities, refinancing needs, interest costs and liquidity after the acquisition-related borrowing; confirm the distinction between committed revolver availability and uncommitted credit lines.
- FY2016 performance against management’s qualitative outlook, including foreign-exchange effects, CooperSurgical trends and Reprogenetics contribution.
- Potential tax-rate variability, deferred-tax assumptions and the status of unrecognized tax benefits.