The Cooper Companies Inc. (COO) reported fourth-quarter 2014 earnings of $1.95 per share, which missed the Zacks Consensus Estimates by 8 cents, but jumped 22% from the year-ago quarter.
The year-over-year growth was driven by a 7% (at constant currency including Sauflon Pharmaceuticals but excluding Aime divestiture) increase in revenues, which reached $468 million but missed the Zacks Consensus Estimate of $477 million.
Quarter Details
The upside in revenues was supported by a 9% increase in CooperVision (CVI) revenues, which was partially offset by a 1% decline in CooperSurgical (CSI) revenues in the quarter.
CVI revenues were driven by 12%, 20%, 11% and 2% growth in Toric, Multifocal, Single-use sphere and Non-single-use sphere, respectively. Geographically, revenues from Americas inched up 5%, Europe, Middle East and Africa (EMEA) increased 13%, while Asia Pacific grew 7% on a year-over-year basis.
CVI’s top-line growth was affected by unfavorable currency and temporary softness in Sauflon business ($50 million in revenues, up 20% from the year-ago quarter) in the U.S. owing to an inefficient distribution network and inventory reductions.
Meanwhile, Silicon hydrogel family continues to drive CVI’s top line, with the revenue figure standing at $198 million. Monthly Biofinity family posted 13% growth, while two-week family of products, Aviara, surged 31% at constant currency. Taking into account silicon dailies, MyDay revenues soared 79% at constant currency.
The CSI revenue decrease can be primarily attributed to a 1% decrease in both Office & surgical procedures and Fertility business. Fertility results were negatively impacted by lower capital equipment sales in the quarter as The Cooper Companies continues to reduce its focus on this low-margin business.
Gross margin contracted 90 basis points (bps) from the year-ago quarter to 63.2% in the quarter. Excluding Sauflon integration expenses, CVI gross margin contracted 100 bps on a year-over-year basis. Excluding restructuring charges associated with the Fertility business, CSI gross margin expanded 100 bps from the year-ago quarter.
As a percentage of revenues, selling, general and administrative (SG&A) expenses declined 200 bps to 36.2%. Also, research & development (R&D) declined 10 bps to 3.7% in the quarter.
As a result, operating margin (excluding integration-related expenses and the related increase in amortization) expanded 130 bps from the year-ago quarter to $23.3% in the quarter. Sauflon operating margin was 13%, lower than the company’s expectations.
Sauflon’s margins were hurt by temporary halt in integration activity in the U.K., after the regions Competition and Markets Authority (CMA) decided to evaluate the acquisition. Large number of overlapping costs also negatively impacted Sauflon’s profitability.
As of Oct 31, 2014, cash and cash equivalents were $25.2 million. Total debt was $1.38 billion as compared with $348 million as of Jul 31, 2014, primarily due to the acquisition of Sauflon. Operating cash flow was $152.1 million, while free cash flow was $108 million in the quarter.
The Cooper Companies repurchased $25.8 million of common stock under the existing share repurchase program, which has $185.7 million of remaining availability.
Acquisitions
In August, The Cooper Companies acquired Sauflon Pharmaceuticals, a European manufacturer and distributor of soft contact lenses and solutions, for approximately $1.1 billion.
In October, CSI completed the acquisition of EndoSee Corp, a developer of an office-based disposable hysteroscopy system, for approximately $44 million.
Guidance
The Cooper Companies slashed its fiscal 2015 revenue and earnings guidance. The company expects revenues of $1.90–$1.96 billion, down from $2–$2.06 billion. CVI revenues are expected in the range of $1.58–$1.62 billion, while CSI revenues are expected between $325 million and $340 million. The downward revision was primarily due to estimated unfavorable foreign currency exchange.
Management expects that The Cooper Companies will be able to gain market share, which will drive earnings in fiscal 2015. Management believes that despite unfavorable currency volatility, the company is well-positioned to achieve 26% operating margin target by 2018, thanks to synergies from the Sauflon acquisition.
The Cooper Companies believes that high product demand (Clariti) and improving manufacturing operations will drive Sauflon’s growth in the long run.
Earnings are expected to be in the range of $7.30–$7.70 per share, down from $8.20-$8.60. Currently, the Zacks Consensus Estimate is $8.18, which is pegged higher than the earnings outlook.
Also, The Cooper Companies expects free cash flow to grow strongly primarily driven by the Sauflon acquisition, which is expected to lower capital expenditures in the long run.
Our Take
The Cooper Companies reported lackluster fourth-quarter results. The company also lowered the outlook for fiscal 2015, which will remain an overhang on the stock. Unfavorable foreign currency remains a major headwind for the company.
We believe that the Sauflon acquisition will benefit the company over the long term. Meanwhile, the modestly healthy market, expanding product pipeline and improving distribution network will drive overall results. However, Sauflon integration will remain a headwind in the near term.
Zacks Rank
Currently, The Cooper Companies has a Zacks Rank #3 (Hold). Some better-ranked stocks include AmerisourceBergen Corp (ABC), CR Bard (BCR) and Merit Medical Systems (MMSI). All three carry a Zacks Rank #2 (Buy).
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