Cooper Companies, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014; the filing also reports fourth-quarter results. Cooper operates CooperVision, a contact-lens business, and CooperSurgical, a women’s-healthcare medical-device business.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $1,717.8 million | $1,587.7 million | +8% |
| Gross profit / margin | $1,091.6 million / 64% | $1,026.8 million / 65% | Profit +6%; margin down 1 point |
| Operating income / margin | $306.5 million / 18% | $305.9 million / 19% | +0.2% |
| Income before taxes | $296.5 million | $312.3 million | Down 5% |
| Net income attributable to Cooper stockholders | $269.9 million | $296.2 million | Down 9% |
| Diluted EPS | $5.51 | $5.96 | Down 8% |
| Cash from operations | $454.8 million | $415.9 million | +9% |
- Capital expenditures were $238.1 million, up from $178.1 million. Cash used in investing activities was $1,346.4 million, principally reflecting $1,109.7 million of acquisition payments.
- At year-end, cash was $25.2 million, working capital was $349.4 million, and total debt was $1,382.4 million, versus $344.7 million of debt a year earlier. The company had $720.3 million available under its revolving credit facility and reported compliance with debt covenants.
- Interest expense was $8.0 million, down from $9.2 million; management expected it to rise in the near term because of acquisition-related borrowing. The effective tax rate was 8.3%, versus 4.9%, largely reflecting prior-year discrete tax benefits and the company’s foreign earnings mix.
Segments and material changes
- CooperVision: Sales increased 10% to $1,392.6 million, including $49.7 million from Sauflon after acquisition. Silicone-hydrogel products rose 27% and represented 49% of segment sales, compared with 43% in FY2013. EMEA sales rose 22%; Asia Pacific sales fell 3%, primarily due to yen weakness.
- CooperSurgical: Sales increased 2% to $325.1 million. Fertility sales grew 7% to $113.2 million; office and surgical procedure sales declined 1% to $211.9 million.
- Consolidated sales growth did not translate into higher operating profit: acquisition, integration and restructuring expenses, product rationalization charges, MyDay start-up costs and currency effects pressured margins. FY2014 included $62.8 million of acquisition, integration and restructuring costs and $35.7 million of intangible amortization.
- Fourth-quarter sales were $468.0 million, versus $411.9 million in FY2013 Q4; net income attributable to Cooper stockholders was $30.8 million, versus $57.4 million, and diluted EPS was $0.63, versus $1.15. The quarter included Sauflon results and related costs.
Outlook, risks and unusual items
- No specific numeric FY2015 revenue or earnings guidance is provided. Management remained optimistic about long-term markets but cited lower-than-historical expectations for market growth in FY2015. Plans include expanding single-use lens manufacturing capacity and launching MyDay in additional markets, including the United States.
- On August 6, 2014, Cooper acquired Sauflon for approximately $1.131 billion, financed with cash and borrowings. The preliminary purchase-price allocation included $857.1 million of goodwill; valuation and integration activities remained ongoing. The company also acquired EndoSee for $44.0 million in October 2014 and expected it to be EPS-neutral excluding acquisition costs and amortization.
- Debt rose substantially to fund Sauflon; variable-rate exposure, refinancing needs and covenant restrictions are risks. Management said available cash, operating cash flow and borrowing capacity were expected to fund operations and anticipated needs, while noting additional financing could be sought depending on the timing and size of activities.
- Other material risks include intense contact-lens competition, dependence on sole-source silicone-hydrogel materials, manufacturing disruption, regulatory approval and compliance requirements, product recalls, foreign-exchange volatility, acquisition integration, and healthcare reimbursement and policy changes. CooperSurgical U.S. sales are generally subject to the 2.3% medical-device excise tax; contact lenses are excluded.
- Johnson & Johnson Vision Care filed a German patent-infringement action in November 2014 seeking damages and an injunction against certain CooperVision products. CooperVision denies infringement and challenges the patent; the company said it could not estimate the likelihood or range of loss. The filing also notes a completed recall of limited Avaira Toric and Avaira Sphere lots.
- FY2014 included a foreign-currency translation loss of $87.8 million in other comprehensive income. Goodwill impairment testing found no impairment. The 2013 comparison included a $21.1 million loss on the Aime divestiture and $14.1 million of insurance proceeds, affecting year-over-year comparisons.
Investor verification priorities
- Assess whether Sauflon’s expected growth, synergies and margins justify the acquisition price, and track final purchase accounting and integration costs.
- Review the company’s debt maturities, variable-rate exposure, covenant headroom and capacity to fund planned capital spending and acquisitions.
- Verify execution and returns on single-use lens capacity and MyDay expansion, including progress against larger competitors.
- Monitor CooperVision margin recovery, CooperSurgical sales trends, foreign-exchange effects and the unusually low effective tax rate.
- Track the German patent case, product-quality or recall developments, and the remaining Sauflon valuation and integration matters.